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Pan Gongsheng, the governor of China’s central bank, announced a raft of measures on September 24 aimed at boosting the country’s flagging economy. The move, which came a week before the 75th anniversary of communist party rule, was made in response to concerns that China could miss its own 5% annual growth target.
The stimulus package included a 0.5 percentage point cut in the amount of cash reserves that commercial banks are required to have as deposits with the central bank. This should free up approximately 1 trillion yuan (£108 billion) for new lending. Pan said that the ratio could be cut by another 0.25 to 0.5 percentage points later in 2024.
The central bank has also made a 0.2 percentage point cut in the rate at which it lends money to commercial banks. Pan signalled that this could be followed by a 20–25 basis point cut in the rate that is charged to borrowers with the best credit rating.
In an attempt to stem the downward spiral that in August saw house prices fall by their fastest rate in nine years, the central bank has reduced the deposit requirement for people looking to buy a second home from 25% to 15%, too.
Credit expansion, at least in the short term, should have a positive effect on financial markets and the price of commodities as investors expect a boost in demand for goods and services. And, following the slew of new measures, this is exactly what we have seen.
China’s main stock index surged by more than 4% within hours of the central bank’s announcement, enjoying its best single-day rally in 16 years. And this was followed by a more than 1% increase in the benchmark price of oil. Sentiment has remained positive since then, with Chinese shares rising by approximately 20% over the five days following the announcement.
Expansionary policies do, however, also come with risks. China’s property market has been in crisis since 2021 when the government introduced restrictions on the amount developers could borrow, leading many to default on their debts. Making large cuts to borrowing costs could reignite a boom in sales and values, creating a new property bubble.
But it could be a while before China’s property market starts to overheat. House prices in China are falling fast and there’s lots of spare inventory. Goldman Sachs estimated in April that the government may need to spend more than 15 trillion yuan to fix the problems plaguing the sector – far more than the recent stimulus blitz can provide on its own.
Predicting the outcome of the central bank’s new economic package in the long-term is challenging. It will probably be a year or two before we start noticing any real effects. But, at least in theory, the expansion of domestic credit that will be triggered by central bank’s lending rate cut, as well as the associated banking stimulus, should spread to the wider economy.
This should reactivate building and construction activities, improve consumer spending, and raise demand for capital goods. This could eventually help China move towards growth that is driven more by domestic demand than a reliance on exports.
China’s economic miracle has traditionally relied on the expansion of exports, which reached their peak at 36% of GDP in 2006. This ratio has come down considerably since then, falling to 19.7% in 2023, but it still remains high relative to comparable economies. In 2022, the export-to-GDP ratio in the US, for example, was 11.6%.
This has made China particularly exposed to volatility in demand in overseas markets and geopolitical shocks, such as the decision of the US in May to introduce new tariffs on imports of Chinese electric vehicles, solar equipment and batteries.
The tariffs have dented demand for Chinese exports in the US market, but they have not altered China’s dominance in global supply chains. The demand particularly for Chinese electric vehicles in the US was, admittedly, already fairly low.
The outlook is not so bleak
China’s economy is undergoing turbulence. But China has consistently outperformed the rest of the world on GDP growth since 1990, and its economic outlook remains relatively positive.
In fact, the 5% annual growth target China has set for itself is still significantly greater than in most other countries. In all G7 countries other than the US, growth is forecast to stay below an annual rate of 2%.
These countries account for a significant proportion of China’s exports, so the weak economic outlook will for now remain a drag on the Chinese economy. However, China will benefit increasingly from infrastructure projects led by the Eurasian Development Bank and the Belt and Road Initiative in the coming years.
These infrastructure projects are connecting China with resource-rich central Asian countries through roads, railways, gas pipelines and electricity networks. China signed a lucrative gas supply contract with Kazakhstan in 2023. And China now accounts for the majority of Mongolia’s mineral exports, which increased by approximately 3% between 2023 and 2024.
China will also benefit from trade with Russia, India, Saudi Arabia and other members of the Brics group of big emerging economies. Over recent years, China has developed closer trade ties with these countries, and has led efforts to admit six new members – Iran, Saudi Arabia, Egypt, Argentina, the UAE and Ethiopia – at the start of 2025.
We await to see what impact the central bank’s new measures will have. But a strong economic outlook for China would be a positive force for boosting consumer confidence and economic outlook for the rest of the world.
Sambit Bhattacharyya receives funding from UK Research and Innovation (UKRI), Economic and Social Research Council (ESRC), European Research Council (ERC), and Australian Research Council (ARC).
