The Chinese government unveiled a huge package of economic measures on Thursday to energize the world’s second largest economy. The pivoting is in an attempt to cope with decelerating hard economic growth, declining consumer demand and Trump’s trade war with Beijing.
These stimulus measures that were launched recently by Premier Li Qiang are essentially a package of the monetary and fiscal policies aimed at stimulating the overall flow of funds in the financial market and stimulating con sumption demand in the country. The package is estimated to be worth about 2 trillion yuan ($280 billion) which put it among some of the biggest economic efforts by the Chinese government in recent months.
One of the major characteristic of the stimulus plan is the proposed change in the RRR for banks in the country. The PBOC through making a 50 basis point cut in the reserve requirement ratio (RRR) unfrozen about 1 trillion yuan in long-term funds for the banks to provide to the strategic sectors of the economy and citizens. This decision may help to enhance financial liberalisation and may lead to decrease interest rates on borrowing.
These policy changes include the cut in the RRR, tax cuts for SMEs which have been badly hit by the current slow growth. The government has estimated that the proposed tax cuts could amount to as much as 500 billion yuan annually to would help the many struggling firms.
The package also aims at increasing spending on infrastructure where the emphasis will be on new technology areas including but not limited to 5G network, AI and charging infrastructure for electric vehicles. Specifically, these projects will create jobs and promote the development of technological innovation and the government has provided 300 billion yuan for them.
The government declared a number of subsidies and incentive packages to increase consumer expenditure on electric vehicle and other home appliances and consumer durables. These measures are part of efforts that seek to boost local expenditure as domestic demand slows down in recent months.
The time that the stimulus package was unveiled, it received different reactions from the various economists and analysts. While most people approve the government’s decisions to sustain the economy, some fear the effects of such massive interference with demand.
Those who promote the idea of the stimulus state that it is necessary to avoid serious deterioration of the economic situation and maintain order. They attribute them to similar measures that China used during the 2008 global Financial crisis as well as other challenges.
Pundits, however, argue that the stimulus could worsen existing structural problems in the China’s economy for example high leveraged debt and over capacity in some industries. Many claim that it is structure- not fiscal- that should be adjusted in order to solve problems with the Chinese economy.
The stimulus package is of great increase to the global economy. China continues to occupy a prominent position in global economy and as such its economic expansion impacts world trade, prices and the financial sectors.
After the statement, the Asian benchmark indices of equity surged; the People’s Republic of China’s Shanghai Composite Index furiously added 2.3% while Hong Kong’s Hang Seng Index gain 1.8%. There was also positivity across Europe and US markets meant that major indices were in the green.
The stimulus measures are expected to affect mostly those countries and industries that are most sensitive to China’s economy. In the case of the rise in Chinese demand for raw material Australia, and Brazil will be the main beneficiaries. Likewise, international business enterprises that stand vulnerable to China’s market might benefit from enhancing prospects for thriving stimulus to consumer expenditures and trading investments.
At the same time, the stimulus package creates doubts in the possibility of the transformation of the Chinese economic model and the transition to a model based on domestic consumption. Opponents have criticized that although when implemented the measures are helpful a number of issues that are critical to China’s development including population aging, increasing labour costs, and environmental degradation are not solved for.
Latest stimulus measures undertaken by the PBOC will draw attention of the policymakers, investors and businesses all around the world as the global economy feels more uncertain with trade wars and geo-political risks constantly coming in to the picture. Market analysts believe that the success or failure of these measures could define the further dynamics of the economic growth of world economies and financial markets in the months and years ahead.
