Last week, China unveiled a large economic stimulus package to boost its moribund economy. Mint looks at whether these measures are good enough to revive the world’s second largest economy. Plus, how will they impact Indian and global economic growth?
It is quite large compared with all the piecemeal efforts Chinese policymakers had announced over the last few quarters. By contrast, on 24 September, the Chinese Central Bank cut interest rates and infused $143 billion into the banking system by cutting the reserve requirements. In a move to boost the stock market, the Central Bank also made it easy for listed firms to buy back their shares and allowed securities firms, insurers and institutional investors to borrow funds easily. Not surprisingly, Chinese stocks posted their best week in 16 years and the Yuan jumped to a 16-month high.
Two days later, the Politburo of the ruling Communist Party tweaked its calendar to discuss the economy in its September meeting and resolved, for the first time, to arrest the property market’s fall. It also promised more effective countercyclical policies which, according to media reports, will take the form of bond issuance worth 2 trillion yuan, almost 1.5% of its gross domestic product (GDP). It will serve two purposes —encourage spending by companies and households; and prevent local governments from collapsing. Rules for buying second homes were relaxed, and mortgage and down payments reduced.
The Chinese economy has been in prolonged slowdown, battered by a property sector in crisis, low consumer confidence and global trade tensions that hurt its exports. Manufacturing is in decline and the jobs data at its worst since December 2022. Economists say the stimulus is a bit too late. Some say a more aggressive fiscal policy is required.
According to the International Monetary Fund, China and India contribute 50% to global economic growth with former’s share being 34%. A Chinese revival will, thus, boost global growth significantly. The World Bank sees global economic growth at 2.6% for 2024 and 2.7% in 2025. It was 2.7% in 2023. With central banks of developed nations appearing to have brought inflation under control without triggering a recession, interest rates are falling. If all goes well, global economic growth may get revised upwards.
Chinese stock markets have risen sharply following the stimulus. If these measures work and the rally sustains, then experts say foreign institutional investors will move funds into China as the valuation of stocks there is more attractive than in India. Also, a sharp revival of the Chinese economy could put an end to the low commodity prices that Indian companies have been enjoying of late. On the other hand, Chinese imports from India, metals and other commodities, will increase, benefitting Indian manufacturers.
