News on the economy and its support have had a firm grip on China reporting in recent weeks: stimulus, consumption, securities. The reason for the many reports and analyses is always one figure: the growth rate of gross domestic product. On Friday, the National Bureau of Statistics will publish the latest data – for the third quarter. Experts and analysts are pretty much in agreement that momentum is slowing.
This is forcing Beijing to change its approach. After all, the path to a technologically superior and independent economy depends heavily on the economy being stable in principle. In order to achieve this, the government is once again resorting to means that it would prefer to do without: new debt. This is not necessarily creative, let alone courageous. But for the time being, it is obviously a means to an end. Jörn Petring takes a look at the current situation for us.
Adaptability is also required from foreign companies when operating in China. On Jan. 1, the regulations for the management of network data security come into force. It will then be mandatory to provide information about personal information that companies collect – what it is used for, where it is stored and for how long, writes Manuel Liu. In addition, personal data may only be transferred from China to another country after a risk assessment.
Sounds unpleasant and complicated. But companies have no choice but to deal intensively with the future requirements for processing, storing and forwarding data. This costs money and nerves.
China’s comprehensive economic stimulus package may come too late. In a Reuters survey of 75 regularly interviewed experts, skepticism prevails as to whether the People’s Republic can still achieve its growth target of five percent this year. The survey was conducted between Sept. 27 and Oct. 15 – i.e. after the stimulus was announced. Instead, analysts only expect growth of 4.8% for 2024 as a whole.
Friday will show just how realistic these forecasts are. The National Bureau of Statistics will then present the latest figures for gross domestic product (GDP) in the third quarter. Experts assume that China’s economic output cooled to just 4.5 percent between July and September. This would be even lower than the 4.7 percent in the second quarter, which had already fallen short of expectations. At the time, Beijing was confident that the economy would pick up speed in the second half of the year. However, this assessment was probably wrong.
Achieving the growth target at all costs is not the government’s goal, says Arthur Kroeber, co-founder of the economic research company Gavekal Dragonomics. In a recent article for the Financial Times, the economist argued that the economic stimulus package is being misunderstood by many. Beijing’s intention is rather to stabilize the economy than to bring about a strong acceleration.
“Xi’s strategic goals have not changed. He wants to divert capital from the real estate sector into technology-intensive manufacturing, which he sees as the basis for China’s future prosperity and power”, says Kroeber. Xi is convinced that long-term growth will be driven by investments in technology that create well-paid jobs and rising incomes. The task is no longer to maximize GDP growth but to build a self-sustaining, technologically strong economy that is resistant to US efforts to slow China’s rise.
According to Kroeber, Xi has not abandoned his vision but has accepted a tactical change. The latest economic data was simply too weak. Now the Chinese leadership wants to achieve short-term stability in order to secure the long-term plan. “However, the measures are being introduced carefully to avoid mistakes”, says Kroeber.
Xu Zhong, deputy secretary general of the state-backed National Association of Financial Market Institutional Investors, also defended the Chinese government’s moderate approach. Too much euphoria must be prevented, he said. Loans should not be allowed to flow into the stock market under the guise of consumer loans and pre-produce a crash there, he argued in the business magazine Caixin.
This was precisely the approach that emerged. Initially, the markets reacted euphorically. However, it took until the beginning of the week before Beijing presented concrete figures. On Tuesday, national media reported on the issue of special government bonds worth six trillion yuan (€774 billion). The news followed Finance Minister Lan Fo’an’s announcement at the weekend that Beijing would “significantly increase” its debt.
For Gero Kunath from the Cologne Institute for Economic Research (IW), the substantial scope of the stimulus is a sign that the Chinese government sees its growth target of five percent this year under serious threat. “The temporary euphoria in the economy, which was triggered by the monetary measures announced at the end of September, is likely to last a little longer”, Kunath told Table.Briefings.
However, the approval process for these funds is apparently taking so long that their effect will be limited until the end of the year. The reason: In contrast to the monetary policy measures taken by the Chinese central bank at the end of September, adjustments to government budgets – including the quota for special bonds – must be approved by the Standing Committee of the National People’s Congress.
Two government advisors close to the Chinese Ministry of Finance confirmed to the South China Morning Post that a proposal with a specific stimulus amount has been submitted to the Standing Committee for approval. However, the government would not be able to announce additional details on the fiscal stimulus until late October or early November at the earliest – after the Standing Committee meeting.
Subsequently, a lead time would still be required to launch a concrete support package for consumption. This would not help the growth target. At the end of October last year, a meeting of the Standing Committee was held at which a resolution was passed to issue additional special bonds worth 1 trillion yuan ($141.3 billion).
Two further meetings that will not help growth this year are scheduled for December. There will be another Politburo meeting focusing on economic issues. The Central Economic Conference is also expected to take place at this time. Further signals about a possible increase in the fiscal deficit and the issuing of bonds for the coming year should then become clear.
Meanwhile, expectations for an event this Thursday are subdued. The State Council has once again invited people to a press conference. This time, Ni Hong, the Minister for Housing, is to speak. However, as in previous days, at similar events with the Minister of Finance, for example, it is unlikely that new aid will be announced. Observers are more likely to expect Ni to further explain and clarify the commitments made at the end of September.
On Sept. 30, the Chinese State Council published the Network Data Security Management Regulations (NDSMR). They will apply from Jan. 1, 2025, and set out compliance requirements for the security of network data. They stipulate how companies must handle personal information, important data and cross-border data transfers.
NDSMR affects all domestic and foreign companies that process personal and organizational data in China. The regulation is potentially relevant for all companies, including small and medium-sized enterprises, says Ralph Koppitz from the consulting firm Rödl & Partner. “Any internal data entry and processing in an ERP system“, i.e. in business software, could be affected by the new regulations, Koppitz explains to Table.Briefings.
The regulations are based on the legal framework for data security, which was previously defined by the Cybersecurity Law (CSL), the Data Security Law (DSL) and the Personal Information Protection Law (PIPL). With the new regulations, Beijing wants to better regulate data processing by companies, protect personal rights and safeguard national security. The Cyberspace Administration of China (CAC) published an initial draft of the NDSMR back in November 2021.
The regulation states that companies must provide information about the personal information they collect – for example, what it is used for, where it is stored and for how long. Data subjects may view their data or request its deletion at any time. In addition, companies will only be allowed to transfer personal data from China to another country if certain requirements are met. One important requirement is a risk assessment of the cross-border data transfer.
The legislator also lists obligations if companies want to collect, process and transfer so-called “important data”. Here too, for example, a risk assessment must be carried out or an internal data officer appointed. The definition remains vague: important data is therefore important “if it could be compromised, directly threaten national security, economic stability, social order or public health and safety”.
The consulting firms Rödl & Partner, Morgan Lewis and Dezan Shira and Associates all see a need for action for affected companies. The extent of this depends on how much data is collected, processed and sent across borders. Koppitz advises: “Companies should take proactive measures to review their current data security regulations and implement the necessary improvements.”
The following points must be taken into account depending on how you are affected:
It is not without reason that Dezan Shira and Associates speak of “a number of challenges that require immediate attention”, especially for companies that process large amounts of data. The lawyers do not rule out the possibility that companies will have to prepare for special staff training and external audits.
Even after the deadline, companies should keep their eyes and ears open, as Chinese authorities are currently developing a series of standards in areas such as the secure management of important data and the protection of sensitive personal information. Region- and topic-specific catalogs for important data are to follow. Koppitz recommends: “It is important that companies continue to keep up to date with relevant changes.”
The Shanghai Cooperation Organization (SCO) has criticized “protectionist trade measures” at its summit. In a joint statement issued on Wednesday, the ten member states, represented by seven prime ministers, “consider it important to continue joint efforts to combat protectionist trade measures that violate WTO rules”. The states did not explain exactly what measures they meant in the statement. In the current situation, however, it can be assumed that the threat of additional EU tariffs on Chinese electric vehicles should be addressed first and foremost. The United States and Canada have also already increased tariffs on Chinese products such as electric vehicles, aluminum and steel.
In the joint statement, the SCO also spoke of “unilateral sanctions” against its member states Iran and Russia. The SCO explained that the “unilateral application of sanctions” violates international law and has an impact on third countries. The reasons for the punitive measures – in the case of Russia the war of aggression against Ukraine and in the case of Iran the supply of weapons to Russia and the Hezbollah militia, among other things – were not mentioned.
Sanctions have led to smaller countries shying away from trading with the two countries, although larger, more influential economies such as China and India continue to buy energy from them. Energy-hungry Pakistan does not import gas or fuel from neighboring Iran, despite its cost efficiency, and a gas pipeline between the two countries has stalled because Islamabad fears US sanctions.
The SCO members gathered in Islamabad on Tuesday and Wednesday for the 23rd summit. Pakistan’s Prime Minister Shehbaz Sharif called for an expansion of the Belt and Road Initiative (BRI) to enhance regional cooperation. “Flagship projects such as President Xi Jinping’s Belt and Road Initiative … should be expanded, with a focus on developing road, rail and digital infrastructure that improves integration and cooperation in our region”, Sharif said in his speech as chairman of the meeting.
He also emphasized the importance of a stable Afghanistan and said that this was crucial for the full implementation of trade opportunities for the SCO member states. Several countries, including Belarus and the Central Asian states of Kazakhstan, Kyrgyzstan, Uzbekistan and Tajikistan, expressed their support for the BRI.
The “joint efforts of the SCO member states” to carry out a pilot selection for joint research and innovation projects within the SCO were also welcomed. According to the communication, a roadmap for the implementation of the SCO member states’ cooperation program for the development of artificial intelligence was also adopted.
The China-Pakistan Economic Corridor (CPEC) is part of the BRI. Beijing has already pumped billions of US dollars into the South Asian country to build road networks, a strategic port and an airport. Prior to the SCO meeting, China’s Premier Li Qiang had held bilateral talks with Pakistani officials on the expansion of the CPEC. They signed 13 “documents”, as the joint statement by the two countries puts it. ari
Last month, the US Federal Reserve initiated its first monetary easing cycle in more than four years, cutting the federal funds rate by 50 basis points from its 20-year high of 5.3 percent to a range of 4.75-5 percent. This is good news for China, which now has much more room to maneuver in its efforts to revive its economy.
Prior to last month’s rate cut, the US and China pursued sharply divergent monetary policies. The Fed had raised its key interest rate ten times since mid-2022, while the People’s Bank of China (PBOC) lowered its most important key interest rate – the seven-day reverse repo rate – from 2.1% to 1.7%.
The PBOC would have eased monetary policy further if the interest rate differential with the US had not led to a devaluation of the renminbi against the US dollar and put pressure on Chinese asset prices. Together with a general deflationary trend, increasing geopolitical tensions and declining population growth, this led to capital outflows amounting to a whopping $787.8 billion in the last three years.
This intensified the pressure on China’s ailing real estate sector, which accounts for around 70% of private household wealth and is equivalent to around 30% of gross domestic product (GDP) (compared to 14% of GDP in the US). Last July, new home prices recorded their sharpest decline in nine years, falling to a level 30 percent below their 2021 peak. The impact of such a sharp decline should not be underestimated: Bloomberg estimates that every five percent drop in property prices in China wipes out around 19 trillion renminbi ($2.7 trillion) in wealth.
The negative impact of falling property prices on income and wealth was exacerbated by falling share prices. The Shanghai Composite Index fell by around 30 percent from its peak in 2021 to mid-September 2024. None of this was good for domestic consumption.
The high US interest rates have also damaged the US real estate market. However, the impact on the wealth of private households was offset by a rapid rise in the stock market. From the end of 2022 to June 2024, the value of the US stock market rose from $40.5 trillion to $55.3 trillion, with the “Magnificent 7” – the seven most important technology stocks – alone contributing almost nine trillion dollars to the wealth of US households.
As the boom on the US stock markets not only supported private household consumption and employment, but also fueled inflation, the Fed postponed interest rate cuts further. However, the Fed could not keep interest rates high forever, not least because they were reflected in higher payments on the US government’s debt of $35.32 trillion.
Of course, this problem is not limited to the US government. Many countries are heavily indebted in US dollars, so higher US interest rates have traditionally been a drag on the entire global economy. Over the past two years, many emerging markets have allowed their currencies to depreciate rather than risk slower growth by raising domestic interest rates. As a result, deflationary pressures have intensified.
The Fed’s easing cycle now underway implies a lower debt service burden and higher liquidity, meaning that these countries can now cut interest rates without fear of excessive capital outflows. China implemented bold monetary stimulus measures just two days after the Fed’s decision.
The PBOC has reduced the banks’ mandatory reserve ratio by 50 basis points, lowered the key interest rates and the interest rates for standing credit facilities by 20 basis points and lowered the existing mortgage interest rates and minimum down payments. In addition, China has introduced new instruments to support the stock market.
A swap facility will give qualifying securities, funds and insurers access to at least 500 billion renminbi to buy shares. And up to 300 billion renminbi in low-cost PBOC loans will be made available to commercial banks to help them finance share purchases and buybacks by other companies.
China has also expanded its pilot program to increase equity investment by asset management companies and invited medium- and long-term investment funds such as the Social Security Fund to enter the market to boost share prices. The Politburo meeting of the Communist Party of China last month underscored the government’s determination to restore the confidence of the private sector and stabilize the overall economy.
Following the introduction of this ambitious package of government measures, China’s main stock indices jumped: the Shenzhen Stock Exchange Composite Index rose by 29.2%, the Shanghai Composite Index by 20.4% and Hong Kong’s Hang Seng Index by 13.8%. This is the biggest increase since 2008 and bodes well for China’s transition to a growth model based on domestic consumption rather than exports.
Although China has been struggling with deflation for some time, the Chinese leadership has so far been reluctant to take any significant stimulus measures. It has not forgotten the lessons of the 2009 stimulus program, not least that excessive credit expansion carries a serious risk of non-performing loans and excessive construction activity. However, the Fed’s easing cycle and the associated more favorable external environment provide an opportunity to fight deflation and revive confidence in the domestic market, buying more time for structural reforms, particularly in the property market. Fortunately, China’s leadership is determined to seize this opportunity.
Andrew Sheng is a Distinguished Fellow at the Asia Global Institute of the University of Hong Kong. Xiao Geng is Chairman of the Hong Kong Institution for International Finance and Professor and Director of the Institute of Policy and Practice at the Shenzhen Finance Institute of the Chinese University of Hong Kong in Shenzhen.
Copyright: Project Syndicate, 2024.
www.project-syndicate.org
It can be done: China’s soccer fans finally had a reason to cheer again. In their fourth attempt at the third round of the Asian qualifiers for the 2026 World Cup in North America, the team led by Croatian head coach Branko Ivankovic managed their first win. The final score was 2:1 (2:0) against Indonesia, giving the People’s Republic a minimal chance of still qualifying for the tournament in two years. The success prompted the 37,000 fans in Qingdao to stage a confetti parade immediately after the final whistle. Incidentally, the opening goal was scored by Behram Abduweli, a striker of Uighur descent. Upcoming opponents for the Chinese are Bahrain and the World Cup-experienced high-flyers Japan, Australia and Saudi Arabia.
News on the economy and its support have had a firm grip on China reporting in recent weeks: stimulus, consumption, securities. The reason for the many reports and analyses is always one figure: the growth rate of gross domestic product. On Friday, the National Bureau of Statistics will publish the latest data – for the third quarter. Experts and analysts are pretty much in agreement that momentum is slowing.
This is forcing Beijing to change its approach. After all, the path to a technologically superior and independent economy depends heavily on the economy being stable in principle. In order to achieve this, the government is once again resorting to means that it would prefer to do without: new debt. This is not necessarily creative, let alone courageous. But for the time being, it is obviously a means to an end. Jörn Petring takes a look at the current situation for us.
Adaptability is also required from foreign companies when operating in China. On Jan. 1, the regulations for the management of network data security come into force. It will then be mandatory to provide information about personal information that companies collect – what it is used for, where it is stored and for how long, writes Manuel Liu. In addition, personal data may only be transferred from China to another country after a risk assessment.
Sounds unpleasant and complicated. But companies have no choice but to deal intensively with the future requirements for processing, storing and forwarding data. This costs money and nerves.
China’s comprehensive economic stimulus package may come too late. In a Reuters survey of 75 regularly interviewed experts, skepticism prevails as to whether the People’s Republic can still achieve its growth target of five percent this year. The survey was conducted between Sept. 27 and Oct. 15 – i.e. after the stimulus was announced. Instead, analysts only expect growth of 4.8% for 2024 as a whole.
Friday will show just how realistic these forecasts are. The National Bureau of Statistics will then present the latest figures for gross domestic product (GDP) in the third quarter. Experts assume that China’s economic output cooled to just 4.5 percent between July and September. This would be even lower than the 4.7 percent in the second quarter, which had already fallen short of expectations. At the time, Beijing was confident that the economy would pick up speed in the second half of the year. However, this assessment was probably wrong.
Achieving the growth target at all costs is not the government’s goal, says Arthur Kroeber, co-founder of the economic research company Gavekal Dragonomics. In a recent article for the Financial Times, the economist argued that the economic stimulus package is being misunderstood by many. Beijing’s intention is rather to stabilize the economy than to bring about a strong acceleration.
“Xi’s strategic goals have not changed. He wants to divert capital from the real estate sector into technology-intensive manufacturing, which he sees as the basis for China’s future prosperity and power”, says Kroeber. Xi is convinced that long-term growth will be driven by investments in technology that create well-paid jobs and rising incomes. The task is no longer to maximize GDP growth but to build a self-sustaining, technologically strong economy that is resistant to US efforts to slow China’s rise.
According to Kroeber, Xi has not abandoned his vision but has accepted a tactical change. The latest economic data was simply too weak. Now the Chinese leadership wants to achieve short-term stability in order to secure the long-term plan. “However, the measures are being introduced carefully to avoid mistakes”, says Kroeber.
Xu Zhong, deputy secretary general of the state-backed National Association of Financial Market Institutional Investors, also defended the Chinese government’s moderate approach. Too much euphoria must be prevented, he said. Loans should not be allowed to flow into the stock market under the guise of consumer loans and pre-produce a crash there, he argued in the business magazine Caixin.
This was precisely the approach that emerged. Initially, the markets reacted euphorically. However, it took until the beginning of the week before Beijing presented concrete figures. On Tuesday, national media reported on the issue of special government bonds worth six trillion yuan (€774 billion). The news followed Finance Minister Lan Fo’an’s announcement at the weekend that Beijing would “significantly increase” its debt.
For Gero Kunath from the Cologne Institute for Economic Research (IW), the substantial scope of the stimulus is a sign that the Chinese government sees its growth target of five percent this year under serious threat. “The temporary euphoria in the economy, which was triggered by the monetary measures announced at the end of September, is likely to last a little longer”, Kunath told Table.Briefings.
However, the approval process for these funds is apparently taking so long that their effect will be limited until the end of the year. The reason: In contrast to the monetary policy measures taken by the Chinese central bank at the end of September, adjustments to government budgets – including the quota for special bonds – must be approved by the Standing Committee of the National People’s Congress.
Two government advisors close to the Chinese Ministry of Finance confirmed to the South China Morning Post that a proposal with a specific stimulus amount has been submitted to the Standing Committee for approval. However, the government would not be able to announce additional details on the fiscal stimulus until late October or early November at the earliest – after the Standing Committee meeting.
Subsequently, a lead time would still be required to launch a concrete support package for consumption. This would not help the growth target. At the end of October last year, a meeting of the Standing Committee was held at which a resolution was passed to issue additional special bonds worth 1 trillion yuan ($141.3 billion).
Two further meetings that will not help growth this year are scheduled for December. There will be another Politburo meeting focusing on economic issues. The Central Economic Conference is also expected to take place at this time. Further signals about a possible increase in the fiscal deficit and the issuing of bonds for the coming year should then become clear.
Meanwhile, expectations for an event this Thursday are subdued. The State Council has once again invited people to a press conference. This time, Ni Hong, the Minister for Housing, is to speak. However, as in previous days, at similar events with the Minister of Finance, for example, it is unlikely that new aid will be announced. Observers are more likely to expect Ni to further explain and clarify the commitments made at the end of September.
On Sept. 30, the Chinese State Council published the Network Data Security Management Regulations (NDSMR). They will apply from Jan. 1, 2025, and set out compliance requirements for the security of network data. They stipulate how companies must handle personal information, important data and cross-border data transfers.
NDSMR affects all domestic and foreign companies that process personal and organizational data in China. The regulation is potentially relevant for all companies, including small and medium-sized enterprises, says Ralph Koppitz from the consulting firm Rödl & Partner. “Any internal data entry and processing in an ERP system“, i.e. in business software, could be affected by the new regulations, Koppitz explains to Table.Briefings.
The regulations are based on the legal framework for data security, which was previously defined by the Cybersecurity Law (CSL), the Data Security Law (DSL) and the Personal Information Protection Law (PIPL). With the new regulations, Beijing wants to better regulate data processing by companies, protect personal rights and safeguard national security. The Cyberspace Administration of China (CAC) published an initial draft of the NDSMR back in November 2021.
The regulation states that companies must provide information about the personal information they collect – for example, what it is used for, where it is stored and for how long. Data subjects may view their data or request its deletion at any time. In addition, companies will only be allowed to transfer personal data from China to another country if certain requirements are met. One important requirement is a risk assessment of the cross-border data transfer.
The legislator also lists obligations if companies want to collect, process and transfer so-called “important data”. Here too, for example, a risk assessment must be carried out or an internal data officer appointed. The definition remains vague: important data is therefore important “if it could be compromised, directly threaten national security, economic stability, social order or public health and safety”.
The consulting firms Rödl & Partner, Morgan Lewis and Dezan Shira and Associates all see a need for action for affected companies. The extent of this depends on how much data is collected, processed and sent across borders. Koppitz advises: “Companies should take proactive measures to review their current data security regulations and implement the necessary improvements.”
The following points must be taken into account depending on how you are affected:
It is not without reason that Dezan Shira and Associates speak of “a number of challenges that require immediate attention”, especially for companies that process large amounts of data. The lawyers do not rule out the possibility that companies will have to prepare for special staff training and external audits.
Even after the deadline, companies should keep their eyes and ears open, as Chinese authorities are currently developing a series of standards in areas such as the secure management of important data and the protection of sensitive personal information. Region- and topic-specific catalogs for important data are to follow. Koppitz recommends: “It is important that companies continue to keep up to date with relevant changes.”
The Shanghai Cooperation Organization (SCO) has criticized “protectionist trade measures” at its summit. In a joint statement issued on Wednesday, the ten member states, represented by seven prime ministers, “consider it important to continue joint efforts to combat protectionist trade measures that violate WTO rules”. The states did not explain exactly what measures they meant in the statement. In the current situation, however, it can be assumed that the threat of additional EU tariffs on Chinese electric vehicles should be addressed first and foremost. The United States and Canada have also already increased tariffs on Chinese products such as electric vehicles, aluminum and steel.
In the joint statement, the SCO also spoke of “unilateral sanctions” against its member states Iran and Russia. The SCO explained that the “unilateral application of sanctions” violates international law and has an impact on third countries. The reasons for the punitive measures – in the case of Russia the war of aggression against Ukraine and in the case of Iran the supply of weapons to Russia and the Hezbollah militia, among other things – were not mentioned.
Sanctions have led to smaller countries shying away from trading with the two countries, although larger, more influential economies such as China and India continue to buy energy from them. Energy-hungry Pakistan does not import gas or fuel from neighboring Iran, despite its cost efficiency, and a gas pipeline between the two countries has stalled because Islamabad fears US sanctions.
The SCO members gathered in Islamabad on Tuesday and Wednesday for the 23rd summit. Pakistan’s Prime Minister Shehbaz Sharif called for an expansion of the Belt and Road Initiative (BRI) to enhance regional cooperation. “Flagship projects such as President Xi Jinping’s Belt and Road Initiative … should be expanded, with a focus on developing road, rail and digital infrastructure that improves integration and cooperation in our region”, Sharif said in his speech as chairman of the meeting.
He also emphasized the importance of a stable Afghanistan and said that this was crucial for the full implementation of trade opportunities for the SCO member states. Several countries, including Belarus and the Central Asian states of Kazakhstan, Kyrgyzstan, Uzbekistan and Tajikistan, expressed their support for the BRI.
The “joint efforts of the SCO member states” to carry out a pilot selection for joint research and innovation projects within the SCO were also welcomed. According to the communication, a roadmap for the implementation of the SCO member states’ cooperation program for the development of artificial intelligence was also adopted.
The China-Pakistan Economic Corridor (CPEC) is part of the BRI. Beijing has already pumped billions of US dollars into the South Asian country to build road networks, a strategic port and an airport. Prior to the SCO meeting, China’s Premier Li Qiang had held bilateral talks with Pakistani officials on the expansion of the CPEC. They signed 13 “documents”, as the joint statement by the two countries puts it. ari
Last month, the US Federal Reserve initiated its first monetary easing cycle in more than four years, cutting the federal funds rate by 50 basis points from its 20-year high of 5.3 percent to a range of 4.75-5 percent. This is good news for China, which now has much more room to maneuver in its efforts to revive its economy.
Prior to last month’s rate cut, the US and China pursued sharply divergent monetary policies. The Fed had raised its key interest rate ten times since mid-2022, while the People’s Bank of China (PBOC) lowered its most important key interest rate – the seven-day reverse repo rate – from 2.1% to 1.7%.
The PBOC would have eased monetary policy further if the interest rate differential with the US had not led to a devaluation of the renminbi against the US dollar and put pressure on Chinese asset prices. Together with a general deflationary trend, increasing geopolitical tensions and declining population growth, this led to capital outflows amounting to a whopping $787.8 billion in the last three years.
This intensified the pressure on China’s ailing real estate sector, which accounts for around 70% of private household wealth and is equivalent to around 30% of gross domestic product (GDP) (compared to 14% of GDP in the US). Last July, new home prices recorded their sharpest decline in nine years, falling to a level 30 percent below their 2021 peak. The impact of such a sharp decline should not be underestimated: Bloomberg estimates that every five percent drop in property prices in China wipes out around 19 trillion renminbi ($2.7 trillion) in wealth.
The negative impact of falling property prices on income and wealth was exacerbated by falling share prices. The Shanghai Composite Index fell by around 30 percent from its peak in 2021 to mid-September 2024. None of this was good for domestic consumption.
The high US interest rates have also damaged the US real estate market. However, the impact on the wealth of private households was offset by a rapid rise in the stock market. From the end of 2022 to June 2024, the value of the US stock market rose from $40.5 trillion to $55.3 trillion, with the “Magnificent 7” – the seven most important technology stocks – alone contributing almost nine trillion dollars to the wealth of US households.
As the boom on the US stock markets not only supported private household consumption and employment, but also fueled inflation, the Fed postponed interest rate cuts further. However, the Fed could not keep interest rates high forever, not least because they were reflected in higher payments on the US government’s debt of $35.32 trillion.
Of course, this problem is not limited to the US government. Many countries are heavily indebted in US dollars, so higher US interest rates have traditionally been a drag on the entire global economy. Over the past two years, many emerging markets have allowed their currencies to depreciate rather than risk slower growth by raising domestic interest rates. As a result, deflationary pressures have intensified.
The Fed’s easing cycle now underway implies a lower debt service burden and higher liquidity, meaning that these countries can now cut interest rates without fear of excessive capital outflows. China implemented bold monetary stimulus measures just two days after the Fed’s decision.
The PBOC has reduced the banks’ mandatory reserve ratio by 50 basis points, lowered the key interest rates and the interest rates for standing credit facilities by 20 basis points and lowered the existing mortgage interest rates and minimum down payments. In addition, China has introduced new instruments to support the stock market.
A swap facility will give qualifying securities, funds and insurers access to at least 500 billion renminbi to buy shares. And up to 300 billion renminbi in low-cost PBOC loans will be made available to commercial banks to help them finance share purchases and buybacks by other companies.
China has also expanded its pilot program to increase equity investment by asset management companies and invited medium- and long-term investment funds such as the Social Security Fund to enter the market to boost share prices. The Politburo meeting of the Communist Party of China last month underscored the government’s determination to restore the confidence of the private sector and stabilize the overall economy.
Following the introduction of this ambitious package of government measures, China’s main stock indices jumped: the Shenzhen Stock Exchange Composite Index rose by 29.2%, the Shanghai Composite Index by 20.4% and Hong Kong’s Hang Seng Index by 13.8%. This is the biggest increase since 2008 and bodes well for China’s transition to a growth model based on domestic consumption rather than exports.
Although China has been struggling with deflation for some time, the Chinese leadership has so far been reluctant to take any significant stimulus measures. It has not forgotten the lessons of the 2009 stimulus program, not least that excessive credit expansion carries a serious risk of non-performing loans and excessive construction activity. However, the Fed’s easing cycle and the associated more favorable external environment provide an opportunity to fight deflation and revive confidence in the domestic market, buying more time for structural reforms, particularly in the property market. Fortunately, China’s leadership is determined to seize this opportunity.
Andrew Sheng is a Distinguished Fellow at the Asia Global Institute of the University of Hong Kong. Xiao Geng is Chairman of the Hong Kong Institution for International Finance and Professor and Director of the Institute of Policy and Practice at the Shenzhen Finance Institute of the Chinese University of Hong Kong in Shenzhen.
Copyright: Project Syndicate, 2024.
www.project-syndicate.org
It can be done: China’s soccer fans finally had a reason to cheer again. In their fourth attempt at the third round of the Asian qualifiers for the 2026 World Cup in North America, the team led by Croatian head coach Branko Ivankovic managed their first win. The final score was 2:1 (2:0) against Indonesia, giving the People’s Republic a minimal chance of still qualifying for the tournament in two years. The success prompted the 37,000 fans in Qingdao to stage a confetti parade immediately after the final whistle. Incidentally, the opening goal was scored by Behram Abduweli, a striker of Uighur descent. Upcoming opponents for the Chinese are Bahrain and the World Cup-experienced high-flyers Japan, Australia and Saudi Arabia.
