China's Economic Revival Plans: Stimulus Measures and Structural Shifts

Chinese leaders have committed to necessary fiscal spending to achieve the year's 5% economic growth target amid increasing deflationary pressures and market anxieties. This strategic shift includes aggressive monetary policy easing and potential capital injections into state banks. Measures aim to boost confidence and consumption while addressing property market dynamics.

Chinese leaders pledged on Thursday to deploy 'necessary fiscal spending' to meet this year's economic growth target of roughly 5%, acknowledging new problems and raising market expectations for fresh stimulus on top of measures announced this week. The remarks came in an official readout of a monthly meeting of top Communist Party officials, the politburo. The September meeting is not usually a forum for macroeconomic discussions, which suggests growing anxiety over slowing economic growth.

The world's second-largest economy faces strong deflationary pressures due to a sharp property market downturn and frail consumer confidence, which has exposed its over-reliance on exports in an increasingly tense global trade environment. A wide range of economic data in recent months has missed forecasts, raising concerns among economists that the growth target was at risk and that a longer-term structural slowdown could be in play.

'New situations and problems' demanded a sense of 'responsibility and urgency,' state media reported, citing the meeting. The politburo's pledges come days after the central bank unveiled its most aggressive set of monetary policy easing measures since the pandemic, flagging cuts to a broad range of interest rates and a 1 trillion yuan liquidity injection into the financial system, among other steps.

Separately, Bloomberg News reported on Thursday that China is also considering the injection up to 1 trillion yuan of capital into its biggest state banks to increase their capacity to support the struggling economy, primarily by issuing new special sovereign bonds. Chinese real estate shares jumped more than 8% on the news and their Hong Kong peers soared 9%, leading broader gains in the stock market. The yuan and Chinese bond yields also rose.

The politburo's endorsement of further stimulus 'represents a strategic shift in macro policy, from piecemeal policies to a highly orchestrated package in the right direction,' said Bruce Pang, chief economist China at Jones Lang LaSalle. 'A pick-up in government spending will probably be sufficient to drive a turnaround in business confidence, market sentiment and economic activities, helping China to catch up with potential trend growth.'

The country would make good use of its ultra-long special sovereign bonds and local government special bonds to support government investment, the politburo vowed. It also pledged to boost income for low- and middle-income groups and support consumption as well as improve childbirth support policies. 'Falling inflation and private sector deleveraging mean that rate cuts alone won't dramatically boost domestic demand,' said Capital Economics analyst Julian Evans-Pritchard.

'Doing so would require more substantial fiscal support. There are some hints of that in the communique.' Policy needed to stop falls in the property market while new commercial home construction should be 'strictly controlled,' according to the meeting.

China would respond to people's concerns, adjust housing restriction policies and lower existing mortgage rates to push forward the building of a new property development model. As flagged by central bank governor Pan Gongsheng on Tuesday, top policymakers said China would lower the reserve requirement ratio and implement 'forceful' interest rate cuts. Typically for politburo meetings, no specific steps were announced and there were no details about the size of the additional stimulus in the works. Officials reiterated a pledge to introduce a law to support the private sector, without saying when the legislation would come out.

(With inputs from agencies.)