Will China’s Stimulus Package Offset its Growing Headwinds?

Will China’s Stimulus Package Offset its Growing Headwinds?

Key takeaways:

• Despite policies like monetary easing, fiscal expansion, and debt swaps; weak consumer demand, high youth unemployment, and local government debt threaten China’s economic recovery
• Potential tariffs and currency pressures from escalating US-China tensions threaten China's export competitiveness and economic stability
• China’s reluctance to implement major consumer-focused stimulus or address systemic challenges in the property sector limits long-term growth prospects

In a recent episode of StoneX Speaker Series, Kathryn Rooney Vera, Chief Market Strategist at StoneX, had an insightful discussion with Tara Hariharan, Head of Research at NWI Management regarding China’s recent stimulus package. They both shared their perspectives on the stimulus’s potential effectiveness and whether it signifies a structural shift in China’s policymaking.

According to Hariharan, in late September and October, China unveiled a “dizzying array” of stimulus measures to address growth and structural challenges in the economy:

• Monetary policy easing - Including broad cuts to interest and mortgage rates
• Fiscal expansion – Local and central government bond issuance to fund initiatives such as subsidies for trading in and buying automobiles, home appliances, and business equipment (China’s own form of a “cash for clunkers” program)
• Bank recapitalization and debt swap program – Intended to bring back hidden debt onto local government balance sheets at a lower borrowing cost
• Property market support – Eased home purchase restrictions for top-tier cities and a relending facility intended to help local governments buy up excess housing supply overhang
• Stock market support - Relending and swap facilities were introduced to support stock buybacks and improve market sentiment

Hariharan believes that these steps have stabilized the growth picture temporarily, but they may not be adequate to tackle consumer and corporate sentiment or turn around the housing market or improve the troubled finances of local governments.

Rooney Vera discussed how China was perceived as “uninvestable” coming into 2024, while now the consensus is moving more in favor of looking for value. She notes the surge in Chinese equities over the year – over 50% since January of 2024 - but also highlighted that the one of the main drags on the Chinese economy is the property market crisis.

Hariharan explained that the Politburo's latest readout highlighted three major policy directions: looser monetary policy, a more proactive fiscal stance, and a commitment to countercyclical measures aimed at supporting growth.

While this signals a shift, Hariharan argues that monetary easing may not effectively address China's weak demand, as credit appetite remains limited despite past rate cuts. Structural challenges, such as declining bank margins, also constrain the impact of further easing.

On the fiscal side, expectations for an increased deficit target (up to 4% of GDP) are already priced in, with measures like bond issuance to address local government debt and recapitalize banks. Unfortunately, these actions are unlikely to provide immediate growth benefits. Significant policy clarity - particularly regarding tariffs - may not emerge until early next year, with final targets expected at the National Peoples Congress in March.

Rooney Vera also discussed the credibility of China’s 5% growth target for 2024, questioning whether this figure is realistic and if growth will continue to rely on manufacturing or shift toward boosting domestic consumption. She highlighted the IMF’s recommendation for China was to rebalance its economy by encouraging household spending, building a social safety net, and reducing taxes.

Hariharan weighed in that she believed the 5% growth target is likely overstated, with actual growth closer to 3-4%, as China has a history of exaggerating economic figures. She identified exports and fixed asset investment as recent drivers of growth but pointed out that consumer sentiment remains weak, particularly due to high youth unemployment. While tier-one city property markets show signs of recovery, Hariharan noted that smaller cities are still grappling with oversupply and lackluster demand.

Rooney Vera asked about the potential tariff options under the incoming Trump administration and how China might respond to these measures. She speculated whether tariffs could trigger a Chinese currency devaluation. Hariharan noted that President Trump appears committed to using tariffs as both a trade leverage tool and a means to address U.S. fiscal imbalances, highlighting potential mechanisms, including emergency tariffs under the IEPAA and the use of Section 301, 201, or 232 tariffs - though these could take time to implement. A Republican-led Congress may push for removing China's permanent normal trade relations status, opening the door to higher tariff rates. Hariharan noted speculation that the final tariff rates might fall below the proposed 60%.

Hariharan emphasized that even a moderate increase in tariffs (e.g., 20-25%) would significantly impact China, reducing its export competitiveness and narrowing its current account surplus. She argued that China might consider currency devaluation as a response. While this would be risky, China’s tight capital controls limit the potential for large-scale capital outflows, making such a strategy feasible.

Rooney Vera and Hariharan also discussed their insights into future trade strategies for 2025, including thoughts on Chinese stocks and bonds and Chinese equities. To watch the full discussion between Hariharan and Rooney Vera along with market outlook into 2025 click here.

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----Written by: Anne Lamedica, Copywriter Team Lead

----Expert: Kathryn Rooney Very, Chief Market Strategist