China’s economic policy has long been shaped by two guiding principles under Xi Jinping, the nation’s leader since 2012. First, Xi has consistently rejected consumer handouts, viewing them as a potential source of laziness. Second, he has refrained from the kind of bold fiscal stimulus that previous Chinese leaders embraced, particularly during the global financial crisis of 2008. Over the past year, however, China’s economic troubles have tested these principles. In a striking shift, Xi has recently allowed China to introduce its most aggressive economic stimulus since 2008, signaling a break from his previous stance.
On September 24th, the People’s Bank of China (PBoC), the nation’s central bank, announced a series of significant measures. These included cutting interest rates, lowering reserve requirements for banks, and reducing the costs of existing mortgages. According to central bank officials, these steps are expected to save approximately 50 million households around 150 billion yuan (roughly $21 billion) annually. Additional reductions in reserve requirements are also possible before the year’s end, stated Pan Gongsheng, the PBoC’s governor.
In an unexpected move, the central bank introduced new tools aimed specifically at boosting the stock market. One such measure allows companies to buy back their own shares by refinancing bank loans. Another supports institutional investors like securities firms and insurers by enabling them to borrow liquid assets from the central bank using riskier assets, such as stocks, as collateral. Pan revealed that these tools would initially provide around 800 billion yuan, with the potential to double or triple that amount if necessary.
Just two days after these financial measures were unveiled, China’s ruling Communist Party Politburo met to discuss the country’s economic challenges. Breaking with its usual political calendar, the Politburo focused on addressing what it called “new situations and problems.” Notably, the government resolved to stop the decline of the real estate market and promised to strengthen countercyclical policies.
Experts speculate that the Chinese government will issue an additional 2 trillion yuan in bonds, roughly 1.5% of the nation’s GDP, according to Reuters. This money will be split between bolstering local governments and stimulating household and corporate spending. Some funds will be directed toward expanding an existing program that incentivizes trading old equipment for newer, more environmentally friendly products. Additionally, the government will introduce a monthly handout of about 800 yuan per child to growing families, a significant shift from China’s historical aversion to direct handouts.
Though these measures fall short of the massive 2008 stimulus, experts agree that China’s latest economic intervention exceeded expectations. Investors have responded enthusiastically, with the stock market rising over 15% in just one week. “This is incredible stuff for that place,” said David Tepper, a hedge fund manager, in an interview with CNBC. The scale of the stimulus might not match the 2008 “bazooka,” but it has effectively restored investor confidence in China’s economic future.