China's Economic Strategy: Economists Seek More Aggressive Measures Against Deflation

China has recently announced new measures aimed at bolstering its economy, particularly focusing on the struggling property sector and local governments. However, many economists remain skeptical about the effectiveness of these actions in combating deflation and stimulating growth.

Key Takeaways

• China promises additional support for the property sector and local governments.
• Economists express concerns over the lack of urgency in addressing deflation.
• Consumer prices rose less than expected, indicating sluggish demand.
• Anticipation builds for a potential fiscal stimulus package in the coming weeks.

New Measures Announced

During a recent briefing, Finance Minister Lan Fo’an outlined several supportive measures for the economy. These include:

• Allowing local governments to use special bonds to purchase unsold homes.
• A commitment to relieve the debt burden of local authorities.

Despite these announcements, Lan did not provide a specific fiscal stimulus figure, leading to uncertainty among investors and analysts. Many had anticipated a substantial stimulus package, potentially reaching 2 trillion yuan ($283 billion), to include subsidies and consumption vouchers.

Economic Indicators

Recent data highlights the challenges facing the Chinese economy:

• Consumer prices increased at a slower rate than expected in September.
• Factory-gate prices have fallen for 24 consecutive months, indicating persistent deflationary pressures.

Economists like Jacqueline Rong from BNP Paribas have noted that the measures announced appear insufficient to stimulate consumption, which is crucial for economic recovery.

Future Expectations

While the government has hinted at more significant fiscal measures to be discussed in upcoming legislative meetings, the current approach has led to mixed reactions:

• Lynn Song from ING Bank expressed doubts about achieving the 5% growth target for 2024 without more aggressive stimulus.
• Goldman Sachs has slightly upgraded its growth forecast for this year to 4.9%, citing increased focus on economic support from policymakers.

Local Government Challenges

The financial struggles of local governments are closely tied to the downturn in the property market. Key issues include:

• Decreased land sales, which are a major revenue source.
• Localities facing difficulties in meeting daily spending needs, leading to delayed payments to contractors.

To address these challenges, the Finance Ministry has proposed measures to allow local governments to swap their debt for cheaper loans, which could help stabilize public services and encourage spending.

Conclusion

As China navigates its economic challenges, the effectiveness of the newly announced measures remains to be seen. Economists are calling for a shift in fiscal policy to prioritize domestic consumption, which could lead to a more balanced and sustainable growth model. The upcoming legislative meetings will be crucial in determining the direction of China's economic strategy moving forward.

Sources

• China Leaves Economists Wanting More Action to Defeat Deflation, Yahoo Finance.