China’s Economic Struggles: Will the Stimulus Help?

Americans are notoriously uninformed about the status of economies around the world, so it may come as a surprise to you to read that China’s economy is in trouble. But it is true, and the Chinese government has announced a stimulus plan to help the economy. Will it work?

Sadly, economists are pessimistic about the Chinese stimulus plans for many reasons. Keep Reading to learn more.

What is China’s Economy Problem?

China’s GDP has had multiple periods of stagnancy, and even a brief downturn in certain periods since the COVID pandemic in 2020. While the GDP is overall higher than it was during the pandemic, Chinese government officials are concerned about the lack of growth.

This lack of growth has manifested in several ways. First and foremost, many developers ran out of credit mid-build, which has created an endemic of unfinished housing developments across the nation. Not only are these total eyesores, but they can’t make money in their current state, basically becoming a money pit. Plus, while some people do buy condos and apartments while unfinished, not enough have been doing so to keep these developers alive.

But that’s not the only issue plaguing China as fewer and fewer individuals start new businesses each year, causing stagnant growth across nearly all industries. While this may seem like a small issue, there is also the problem of private business closure—which is increasing at an alarming rate as fewer and fewer Chinese spend money on discretionary items, instead needing conserve money to focus on household bills.

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What Has the Government Proposed?

The Chinese government has initiated a massive stimulus package composed of three stages.

Stage 1

The first stage of the stimulus plan is to cut loan interest rates. This would lower the cost of mortgages or building loans used by developers. The hope is that developers will finish their projects and that citizens will be able to get a mortgage for one of the new properties.

Stage 2

Stage two of the stimulus package is to cut interest rates on current home loans to both encourage discretionary spending and to help citizens out of debt. The government is also hoping that individuals who already have a home will consider purchasing a second home.

Additionally, the government is hoping that companies will be incentivized to purchase excess housing and turn it into affordable housing units that can be leased back to the government.

Stage 3

The final stage of the stimulus package is actually for investors, and it increases the capital the investors can borrow to invest in the market. This procedure will also help banks, who can refinance to hopefully get out of any debt while also boosting investor confidence.

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Will This Stimulus Package Help?

Economists are very negative about the stimulus package overall, and it's easy to see why. We will discuss their reasoning below.

1. Real Estate Sentiments are Changing

Socially, real estate used to be a sign of wealth, but shifts within Chinese society have made this no longer the case. Rather than owning two homes in China, many Chinese individuals are looking abroad for their second home—while others don’t even want a second home to begin with.

And that’s not the only problem. Much of the available real estate is outside of city centers and in locations which aren’t attractive to Chinese people. The location of the demand and the supply simply aren’t adding up. And with the decline in birth rate and surplus of real estate, no price cuts are going to solve that problem.

This brings us to our final issue with the real estate policy. Due to the one-child law in place for several decades, there is a lack of women in the country of China. Many Chinese men have had to leave the country to find a bride and have often stayed in the country where she lives. Those who do stay, if they are lucky enough to get married, don’t need massive houses due to the birth control regulations. The remaining men will likely stay single, meaning they don’t need more than an apartment and are unlikely to invest in more real estate.

2. Private Sector Discrimination

The Chinese Government is notoriously discriminatory against private businesses. They make it almost impossible to start a business and stay afloat. They also heavily push businesses run by the government. While this works to make money for the government, it discourages many individuals from innovation and creating a business—because the risk of doing so is just so high.

The current anti-private business sentiments actually encourage Chinese inventors or business owners to open their businesses elsewhere around the globe, and this stimulus package won’t fix that.

3. No Long Term Relief

Investors were excited when Chinese markets jumped for the first time in months after the announcement of the stimulus, but it hid a deeper issue. None of these fixes proposed by the government are enough to cause long-term change in China.

These stages won’t solve the damage done by the one-child laws, nor will they lead to the relocation of real estate to desirable locations. It’s like putting a Band-Aid across a waterfall. It does basically nothing.

4. Increased Climate Impact

China is the number one producer of carbon emissions globally. While this economic boost will hopefully stimulate the economy, it will also increase carbon emissions, which is a huge issue nationwide. As such, some individuals are against them.

Plus, with huge taxes on carbon emissions, any money saved through the stimulus may end up being charged as a tax later.

Overall, we agree with the economists on this one. The stimulus resolution proposed by the Chinese government won’t solve any of their economic issues long-term. They are temporary solutions that were proposed to try to undo years of damage due to poor fiscal policies. Thus, our trust in Chinese markets hasn’t been restored just yet.  

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