How Much Will New Stimulus Improve China’s Economic Outlook?

China’s economic support measures are better described as stabilization than stimulus. Unlike in previous full-bore stimulus programs, for instance in 2008 and 2015, the aim today is not to engineer a boom but simply to halt the deterioration in economic conditions evident in the past few months, and stabilize growth at around the target of 5 percent.

China’s long-term economic strategy has not changed. Xi Jinping’s intent, as outlined in the Third Plenum decision this past July, is to shift capital from real estate and infrastructure into technology-intensive manufacturing. The aspiration is that the productivity gains from high-tech industries will deliver the long-run growth that China needs, offsetting the impact of a declining population and other negative factors. Another key goal of this strategy is to ensure that China becomes self-sufficient in core technologies, enabling it to withstand the pressure of U.S. containment policies. The leadership is fully prepared to tolerate a period of relatively sluggish growth as the price of making this structural shift.

But the stabilization policies of the last month show the limits of this tolerance. They also reflect a judgment that the contraction of the property sector, now into its fourth year, has gone far enough, and that policy should shift from restrictive to modestly supportive. The final policy move, expected in early November—issuance of long-term central government debt to swap for provincial debt—is a long-overdue recognition that the financial position of heavily indebted provinces is unsustainable, and that direct fiscal support from Beijing is needed.

Over the next year or so, the economic package is likely to succeed in its limited aims: reversing the decline in housing sales, and providing local governments with relief from interest payments so they can pay back wages to their employees and overdue bills to the companies that supply them with goods and services. This should be enough to stabilize GDP growth at somewhere close to the 5 percent target. The benefits to the rest of the world, however, will be modest. Neither consumer spending nor commodity demand will enjoy a dramatic pickup. And Beijing’s steady commitment to its investment-first growth strategy means that other countries will still face the challenge of intense competition from low-priced Chinese imports.

I conceptually divide the stimulus measures into three groups. One group of measures, like those aimed at boosting the stock markets or at promoting consumption through non-fiscal means (e.g. “consumption festivals”), will have almost no impact on boosting economic activity. A second group of measures are mainly designed to continue supporting the supply side of the economy, but with domestic demand so weak, these measures are likely to have such low multipliers that they cost more than they deliver, with the gap between the two showing up in a worsening of the country’s overall debt burden.

It is the third group of measures that matter. These are measures that boost income directly or indirectly. Direct measures include higher pensions, an increase in payments to students and to the poor, consumption coupons, rent subsidies, and various forms of trade-in subsidies. Indirect measures include funding local governments so that they clean up payment arrears to government workers and local businesses. Only measures that transfer income directly or indirectly to households are likely to create any strengthening of the demand side of the economy, and this in turn is likely to boost business investment.

But in the end, these are all temporary measures, and are not sustainable for more than a few years. Until domestic income distribution is changed so that a larger share goes to households and a smaller share goes to businesses and government, China will continue to suffer from weak domestic demand. In turn, weak demand means that economic growth will remain over-reliant on domestic investment, something which Beijing is reluctant to see, or on rising trade surpluses, which the rest of the world cannot absorb.

But while the need for a redistribution of income has become widely recognized among prominent economists and policy advisors in China, we still haven’t seen a serious discussion of the cost of this redistribution. Rebalancing the economy towards domestic demand requires that the implicit transfers that undermined domestic demand be reversed—these include managed credit allocation, low interest rates, an undervalued currency, labor restrictions, overspending on business logistics and infrastructure, and so on. But after two to three decades during which the country’s manufacturing prowess and the strength of local political, banking, and business elites have been built around these transfers, reversing them will be politically difficult and will undermine China’s manufacturing prowess.

For now, the best we can expect are fiscal measures that temporarily resolve the demand imbalances by relaxing household budget constraints. Although these have been promised, Beijing still hasn’t confirmed either the specific measures or the expected size of the stimuli. My best guess is that we will see concrete measures proposed in November, and that these will be successful in boosting economic activity in the short term (although perhaps not soon enough to matter to 2024). If that is the case, we are likely to see more such measures proposed in 2025.

I have not visited the small towns and blue roads of China for several years, so I have no feel for the way things are working out right now for real people who live there and for companies that do business in China.

But I can see very clearly that the same old international misconceptions about China persist. We currently have visible evidence of economic decline and impoverishment. But foreign analysts want to keep the game going, and they keep saying that the economy is the important thing to China’s leaders, that they will have to rebalance, that Beijing can and must choose to boost the economy and liberate the private sector.

How very silly that line of analysis is. Anyone who has the faintest inkling of Chinese governance for the last 2,500 years knows that governance is about stifling efficiency gains in favor of social control. Xi Jinping has been reiterating that point extremely clearly since he took over in 2012. Why would anyone think that the Beijing government cares one bit about making the economy surge again?

The timing of Beijing’s September pivot is closely tied to why it took so long. By mid-September, it had become clear that China’s economy was facing a perfect storm—deflation, weak consumer demand, and a collapsing real estate market. Without immediate intervention, it was obvious the country would miss its GDP target for the year. Advisors, former officials, and foreign business leaders conveyed this urgency to Beijing, both publicly and behind closed doors. The previous piecemeal efforts had failed to make a significant impact, and it wasn’t until the crisis deepened that policymakers realized they could no longer hold back.

But the delay wasn’t purely economic. Youth unemployment remained stubbornly high, and memories of the “white paper revolution” were still fresh in Beijing’s mind. The threat of social unrest loomed large, and the leadership knew that waiting any longer could risk tipping the scales toward widespread discontent—or worse, instability.

External factors also played a role. The U.S. Federal Reserve’s interest rate cut announcement gave China’s central bank the room it needed to ease monetary policy without triggering capital flight or further weakening the yuan. This external shift gave Beijing the breathing space it needed to roll out a more aggressive policy response.

This response was a flurry of stimulus measures, and an urgency to act conveyed through a series of press conferences and public statements. This sparked a frenzy, reviving a sluggish stock market and boosting investor confidence. Investors were finally convinced that the government was serious about addressing the economy’s woes.

However, with the A-share market still heavily dominated by retail investors—who are highly sensitive to shifts in policy tone and prone to herd behavior—volatility is likely to persist. This leaves Beijing with the challenge of managing a delicate balance between market expectations and policy direction. This bull market remains fragile.

Still, looking ahead to the mid-term, there are reasons to believe the rally could continue for a while: Chinese stocks are relatively cheap, and sectors critical to Beijing’s policy agenda—such as semiconductors, green energy, and advanced manufacturing—are likely to see consolidation and growth as they receive targeted government support. Moreover, a new consensus has emerged in Beijing that stabilizing the real estate sector is an immediate priority. Previously, the property market was viewed as a structural issue to be addressed over the long term, with solutions like hukou reform and managing local debt seen as gradual, multi-decade efforts. More direct interventions—such as liquidity injections to developers and banks, or relaxing previously introduced purchasing limits—were treated with suspicion, due to fears of moral hazard and reflating the bubble. But Beijing has now adjusted its timeframe, recognizing that property market stability is crucial in the short term for restoring business confidence and boosting domestic demand.

There’s another, often overlooked, reason for optimism: New policy tools and institutional designs. The introduction of structural monetary policy tools—such as stock buyback loans and asset-backed lending facilities—marks a significant shift in how the central bank intervenes in the markets. These tools are creating a market floor by encouraging institutional investors to increase their holdings. Additionally, the formation of a joint task force between the Ministry of Finance and the People’s Bank of China to manage the national bond market signals greater coordination between fiscal and monetary policies, laying the groundwork for more effective interventions moving forward.

In the long term, however, the sustainability of these stimulus measures will depend heavily on Beijing’s ability to address deeper structural issues. Broader financial reforms are essential. Revitalizing the IPO market and reigniting venture capital and private equity activity would help channel capital into high-growth sectors. Attracting institutional investors to play a more prominent role in stabilizing the market, rather than relying on speculative retail investments, will be crucial to fostering a healthier, more sustainable capital market environment.

On the fiscal front, the current arrangement between the central and local governments remains misaligned, with local governments shouldering the bulk of spending obligations while their revenue sources remain limited. One of the most pressing reforms will be shifting a greater share of fiscal responsibility back to the central government, which currently accounts for only about 14 percent of total fiscal spending.

To address the underlying issues in China’s economy and shift toward stronger domestic demand, Beijing needs to confront the inadequacy and regional disparities in public services like education, healthcare, and social welfare. For this, a much more proactive fiscal role is required—one that can better allocate resources and prioritize redistribution and equity. A crucial reform area is tax policy. China’s personal income tax contribution is disproportionately low, representing just 8 percent of total tax revenue, far below the levels seen in other major economies. Implementing a more robust income tax system could help narrow the income gap and provide more fiscal resources to Beijing.

While the central government may not want to take on more fiscal responsibility, it may have no choice. The central government’s balance sheet is the only relatively healthy part of the state left: Local governments are deeply in debt, burdened by drying-up land sales, and household balance sheets have been eroded by the property market collapse. Businesses, facing low domestic demand and shrinking profit margins, are unlikely to drive a recovery on their own. In this context, the central government is the only actor with the fiscal capacity to address these problems. Shifting more responsibility to Beijing could ultimately be a necessary step to prevent economic stagnation and manage long-term risks.

Of course, Beijing would likely resist spending too much too fast—fearing it could refuel bubbles or deplete its war chest too soon. But the need to stabilize local finances and rebuild confidence could force its hand.

I think two important factors contributed to how and when the Chinese government’s pivot to stimulus happened. First, when the U.S. Federal Reserve cut rates on September 18, there was finally enough easing in the international monetary environment for Chinese authorities to commit to a large-scale stimulus program. It was no coincidence that the September 24 People’s Bank of China-led press conference announcing a monetary bazooka took place less than one week after the Fed rate cut.

Another crucial factor that ensures this pivot is not just monetary but something deeper is that the economic downturn has affected social stability. Over the last few months, we have seen increasingly frequent instances of extreme violence, often of a lone-wolf and/or suicidal nature. These include a gun theft and deadly shooting of a police officer in Jilin Province on September 2, a school bus rampage that killed 11 children and parents in Shandong province the very next day, two separate knife attacks on Japanese citizens on June 24 and September 18, and the mysterious death on September 19 of the Hunan province finance chief along with two men the authorities say are suspects in her murder.

Most of this happened in the weeks leading up to the September 24 announcement of the stimulus measures. But even after a Politburo meeting on September 26 that confirmed the government’s commitment to stimulus, a mass stabbing in Shanghai killed three people. Unlike many other local police forces dealing with similar cases, Shanghai directly attributed the event to economic troubles.

This string of events fed public anxiety about social stability, which is a core, explicit mission of the Chinese authorities. The government might wait for some time to act on an economic recession, but fears of civil unrest will prompt the state machinery into decisive action.

Together with the Fed rate cut, I believe that fears of social instability are causing the Party-state to adopt a “whatever it takes” approach to re-stimulating the economy. So I would not pay too much attention to any individual policy, because if one approach does not work, the government will push another until the desired results are achieved. Therefore, I believe that in the short term (one to two years), the stimulus program will provide a good cushion for China's economy.

In the long term, my optimism is based on two things. First, China’s vast inland and lower-tier regions still have room for development. The low cost of living but not-so-low quality of life have made such places both very livable and also great for businesses. People and businesses are flowing to many second- and third-tier regional centers, making many of these places fare far better than first-tier cities. Essentially, China’s GDP is going to double because those cities’ per capita GDP will get close to first-tier city levels.

Second, household registration reforms and fiscal reforms as announced in the Third Plenum held in July will bring about one thing: In the long run, China’s local governments will shift from a real-estate- and manufacturing-centered model to one that’s more balanced toward consumers. This will create strong domestic demand and will restrain over-investment and involution in many industries.

There have certainly been a lot of growth-boosting efforts announced by Chinese officialdom of late. Starting with a hastily-arranged press conference by the People’s Bank of China in late September, they have included interest rate cuts, cash infusions to state banks, new incentives to buy property, and efforts to reduce local government debt. Now, many observers are betting that the Standing Committee of China’s National People’s Congress will approve a much-anticipated multi-billion-dollar stimulus during its meeting scheduled for November 4-8.

What is Beijing signaling through all these policy actions? That top leaders have finally decided China’s economic growth is at serious risk. The trouble is all of these measures probably won’t be enough. Instead, what China needs in order to unlock long-term, sustainable growth is a series of key reforms, none of them easy.

First, Beijing policymakers need to overcome Chinese households’ and companies’ deeply-entrenched dual crises of confidence, which happen to be mutually reinforcing: Nervous companies don’t invest or create new jobs; households faced with a dearth of good employment opportunities and stagnant incomes don’t spend.

As an important step towards building back popular faith in the economy, China needs to significantly boost social welfare spending for its people, in order to overcome the Chinese propensity to engage in precautionary saving—when people who are worried about high medical bills, rising education costs, poor pensions, and weak wages save for a rainy day rather than open their wallets. That requires leaving behind the very non-socialist view that providing the people with an adequate social safety net risks encouraging laziness, a popular belief in China encouraged by its biggest proponent Xi Jinping, who often refers to the dangers of “welfarism.” (Small steps like the cash handouts provided to China’s poorest just before the October 1 National Holiday are not enough. And a frothy stock market does little for families who hold 70 percent of their household wealth in their homes, whose value has been on a downward slope during the multi-year property slump.)

The government must move away from what now appears to be the default attitude of the senior leaders of the Chinese Communist Party to view private entrepreneurs with deep suspicion, which when combined with the many-years-long bias in favor of state enterprises when it comes to government funding, is a direct cause of the dearth of confidence afflicting the private sector.

And it needs to finally fully do away with Mao-era legacy policies including the dual land system and the hukou. The dual land system makes it very hard for rural people to rent or sell their land at a fair price, while urbanites in many cases have gotten rich buying and selling property. The hukou, or household registration policy, keeps about one half of Chinese stuck in second class status, afraid for their futures, and therefore unable and unwilling to participate as full actors in China’s economy, nor able to help power the long sought-after transition to an economy really driven by household consumption.

China has shown the world it is worried about its slowing growth and getting stuck in a rut of economic diminishing returns. It has not shown it is willing to take the necessary steps to avoid falling into that very possible fate.

The impressive surge in the Shanghai market that followed the announcement of the central bank’s 500 billion renminbi swap facility for domestic institutional investors comes amidst a fairly relentless stream of concerning data on the mainland economy overall. (The swap facility enables brokers and asset managers to exchange illiquid assets at the central bank for more liquid assets that can be used for stock purchases.) The market rose 29 percent between September 13 and October 8. It dropped again, but the composite index remains 22 percent above its low. For the key elites and institutions holding shares, this could be mission accomplished.

Domestic institutional investors are regularly estimated to hold as much as 30-40 percent of the listed assets, so the surge in asset pricing should not be surprising and expectations of private sector investor reengagement would not be unreasonable. Yet the peak of the post-announcement surge, October 8, yielded quickly to a 7-8 percent downward reset.

The effort to stimulate capital markets cannot be considered apart from efforts to stimulate China’s other troubled asset base, the property market. The question about the sustainability of recovery is common to both, but in some ways the property market is a forerunner of the two. As such, it raises serious questions of how well the stimulus will work.

There are two questions I would raise about the sustainability of this market upswing: How does this relate to the real economy? And will retail investors and other sources of private sector wealth be drawn into the market to sustain these new levels?

How does this relate to the real economy? Influential analysts of China’s economy are reaching a consensus that China’s GDP growth is on a long, slow decline curve, China’s role in global GDP is declining, local government debt is all but irresolvable, and central government revenue is declining. The costs of servicing, containing, and potentially retiring China’s massive debt accumulated over decades significantly constrain financial resources for new investment in the real economy and infrastructure to meet 14th Five Year Plan goals.

The People’s Bank of China’s swap facilities themselves provide stimulation only to the financial, not the real economy, at least not immediately or directly. We know that as China’s public debt accumulated, returns on invested capital remained very low, and total factor productivity gains stalled. This dynamic was indirectly acknowledged with the roll-out of campaigns encouraging “new quality productive forces” (新质生产力, xin zhi shengchanli), an appealing but elusive goal that has not been provisioned with a path leading to it. The inefficient nature of growth is also evident in the parade of solutions promoted to help ease resource insufficiencies at the local level for social services, debt burdens, infrastructure, and the property crisis itself.

Short-term stimulus, momentum, and transient capital flows are not enough to sustain surges in capital markets. There must be credibility in the growth prospects of the listed companies. The cornerstones for that are strong fundamentals in the economy overall, compelling demonstrations of growing market demand, and investor faith in the innovative capability and productivity improvement of the listed companies themselves.

Will retail investors and the private sector remain bullish? In 1990, the Shanghai Stock Market reopened for the first time since 1949; a bit more than one generation ago, there were no retail investors. But as investors at the top 10 percent of China’s population gained disposable income and significant wealth, they quickly learned a great deal about investing, in many cases through hard lessons. These include painful excursions into unregulated lending markets in the wake of the global financial crisis, investments in residential property prior to the great meltdown of the sector, and investment in China’s capital markets with their strong ups and downs. This is not to say investments over the decade did not create significant wealth for a large number of urban families. But Chinese investors have learned caution because it’s now crystal clear that no asset investment rises in perpetuity, and most can suffer abrupt losses. Current data suggest wealthy urban families are safely growing their savings accounts, neither consuming nor investing in alternatives.

It is difficult to determine what role retail investors have played in China’s markets historically. When regulators required brokerage houses to draw in private sector wealth, there were apparently a vast number of ghost accounts established to meet the regulatory mandate. If market momentum fails to port private savings account funds into the capital markets, the stimulation initiatives amount to the state both funding and suffering the ups and downs of the market, a kind of closed loop that has no discernible benefits.

Ultimately, China’s retail investors may answer the question of how sustainable high and steady valuations will be. Private investor sentiment will play a defining role.

Overall, consumer confidence measures in China are down from the 2021 peak of 127 to 86. Worries include the devaluation of the yuan, the property crisis, and whether the children in wealthy families will enjoy the continued growth of quality of life that their parents experienced in boom-time China. At the moment, there are reasons to be concerned.

The question asked here, about the sustainability of the current market surge, is the same question China’s private wealth holders will ask before opening their own investor purse strings.

Hong Kong is as good as anywhere to serve as a bellwether of future trends in China. And the trend, so far, has been to turn inward. Despite the bubbly response of the stock market to the policy broadside on September 24, and two big IPOs in October (Horizon Robotics at $696 million and China Resources Beverage at $650 million) it will be a long time, if ever, before the Hang Seng Index (HSI) reaches 31,000 again, as it last did in 2021, or Hong Kong tops the IPO ranks globally, as it did in 2018 and 2019. The next policy announcement on November 8, according to Deputy Finance Minister Liao Min, will also have a positive impact on capital markets.

With both moves, professionals in the People’s Bank of China and Finance Ministry seemed to be in charge, timing the “bazooka” for after the initial Fed decision to reduce interest rates on September 20, and the fiscal program until after the U.S. election on November 5. It is likely a mistake, however, to see either move in the light of the structural measures that Western economists say are needed.

The new China, and the new Hong Kong, are inward-looking and determined to establish a new regime independent of hostile (read: U.S.) influence. While it remains China’s external financial platform, Hong Kong’s animal spirits will neither be celebrated nor given full rein. While it is not quite managed capitalism, Hong Kong businesses are encouraged to stay in their lanes, particularly by directing attention to the Greater Bay Area, as service providers and financiers. “International” now means Southeast Asia, the Middle East, and the BRICS bloc, now in the process of expanding. Telling good stories has become a Hong Kong government mantra, echoing central government platitudes. In Hong Kong’s case, the concept of telling good stories is antithetical to the kind of robber baron capitalism that once prevailed.

The HSI has settled down to 20,000 after briefly hitting 22,000. The China Securities Regulatory Commission has removed barriers on international IPOs. The listings are mostly very small: a restaurant chain here, an EV battery maker there, nuts and bolts and kitchen appliances. The majority of the funds raised by Chinese companies in the U.S. this year were from one IPO—that of EV manufacturer Zeeker, which raised $441 million in May.

After the long-delayed Third Plenum, the unusual September Politburo meeting to focus on the economy, and the monetary and coming fiscal pronouncements, a new regime is taking shape, based on a very clear intent to foster high-tech autarky and allow limited globalization through the capital markets. The kinds of firms that are turning to international capital markets through IPOs are ones that fit the new domestic agenda of either “new productive forces” such as new energy vehicles, or reflect support for small and medium enterprises (SMEs). This is true of the recent Horizon Robotics and China Resources IPOs in Hong Kong as well. There is something that feels a bit stage-managed about them, too mundane to be called China concept stocks and not substantial enough to generate wide excitement. In the new regime, pandering to international capital is just not part of the game.

The Chinese economy is not the same as that of the U.S. or any other free market economy. Free market economies run according to the rule of law. China is a one-party state, and the ruling party is above the law. Beijing has a lot more arbitrary “tools” at its disposal. It can do things no Western government can. Beijing can order banks not to enforce loan collections, or order construction companies to complete work without pay so that it can effectively “freeze” a property or financial crisis indefinitely; it can also order central banks to give money to brokers to drive up stock prices and at the same time use police to stop investors from shorting to keep indexes at a certain level.

China’s “stock markets” are not the same as the ones in free economies. They not only lack basic accounting transparency, the government can arbitrarily intervene in them at any time. They have little to do with the fundamentals of the real economy; the stock markets are riding high while the real economy is tanking. There’s a joke within the international investors’ community: it’s not fair to say that the Chinese stock market is a casino, because casinos have rules.

In Xi Jinping’s “New Era” China, developing the economy is no longer the priority: national security has been made job number one. And the biggest perceived threat from the current Chinese leadership is the “comprehensive competition,” or rivalry, with the U.S. Xi’s government has pulled out all stops to force a remodel of the Chinese economy over the past decade, from low-end manufacturing, to a high-tech and more competitive one, by marginalizing non-state sector “low quality” businesses, the service sector, and the financial sector in favor of a centralized state enterprise-driven model that focuses on a select few high tech or “high quality” fields. There’s no evidence that Xi has shifted in his long-term strategy.

With these three concepts in mind, it becomes easier to make sense of Beijing’s latest actions and the present state of affairs in China.

Chinese officials openly admit their economy faces “difficulties and challenges.” They say the latest stimulus is designed to stave off a financial crisis, stabilizing the economy, encouraging investment, and lifting consumer confidence. If we take their word for it, we can assume more stimulus or support policies will be forthcoming. This will likely keep up the bull market.

However, because this rally depends solely on government stimulus and has little to do with the state of the real economy, and there is no sign that Xi is changing his long-term strategy in order to refocus on the private sector or social welfare to boost consumer confidence, the longevity of the artificial bull market depends solely on government actions.

In the past, Beijing has intervened in the stock markets a number of times, most notably in 2008 and 2015. Those rallies all eventually fizzled out once stimulus stopped.

It’s worth noting that compared to past stimulus actions, actions and words from Chinese officials this time around seem hesitant if not reluctant. In the aftermath of the 2008 global financial crisis, as soon as then Premier Wen Jiabao announced his four trillion renminbi (U.S.$300 billion) stimulus package, the relevant ministries readied their comprehensive support policies in a matter of days. This time, government actions and announcements have been tardy and in drip feed.

The official reason given for the apparent tardiness is that many more policies are still being studied. This normally indicates that the big boss in the centralized decision-making system has not given the final go ahead. It’s widely rumored that more announcements are likely to come in November.

Yes, November—after the U.S. election results are in.

Once again, it’s worth remembering the number one job for Xi’s China is to safeguard “national security”—to win the comprehensive rivalry with the U.S. The economy is only one part of the overall calculation. The world knows little about what Xi and Putin really talked about in Kazan. It is reasonable to assume that Xi wants to see who he will be dealing with in the White House before making the next move. For example, if Trump wins and carries out his new tariff war promise, then Beijing’s policy responses will likely be different from how it would respond to a Harris win.

That being said, in the long term, there is little reason for optimism for the Chinese economy, amid increasing geopolitical uncertainty, demographic collapse, an unresolved property bubble, collapsing consumer confidence, worsening unemployment, and a financial crisis on hold, just to list a few. Without leadership changing strategic track, it’s hard to see how things can turn around in the long term.

If this year’s Nobel Prize winners for economics are to be believed, China under the Communist Party rule is an “exclusive” economy model that does not offer its citizens individual freedom and does not guarantee private property rights. This model will eventually fail. And the West’s “inclusive” model will eventually come out on top.