DON´T CELEBRATE CHINA´S STIMULUS JUST YET / THE ECONOMIST

Too soon to party

Don’t celebrate China’s stimulus just yet

It will take more than a spectacular stockmarket rally to revive the economy

China’s policymakers have blinked at last. 

For 18 months, even as deflation set in and economic sentiment curdled, stimulus was half-hearted and piecemeal. 

Then last week came a belated turnaround. 

Officials unleashed a range of easing measures, suggesting that their pain threshold had been reached.

Stockmarkets are rejoicing. 

As Hong Kong’s market reopened on October 2nd after a public holiday, shares rose by more than 6%, capping a rally of over 20% in a mere six frenetic trading days. 

But China will need even more stimulus to escape from its deflationary trap.

The mood shift began with the central bank. 

On September 24th, a week after America’s Federal Reserve had eased policy and given it more room for manoeuvre, the People’s Bank of China cut interest rates, eased reserve requirements for banks and reduced the cost of existing mortgages. 

It also introduced new tools to stoke the stockmarket. 

Two days later, China’s Communist Party promised to arrest the decline in the property market and to fight the economic slowdown more forcefully. 

Media reports suggest the central government may soon borrow an extra 2trn yuan ($285bn) or roughly 1.5% of GDP. 

Half will help local authorities deal with their debts; the other half will help consumers, including direct handouts to families with more than one child.

The measures represent a long overdue change in the style and urgency of China’s policymaking. 

For months it seemed that the government was scared of doing too much, rather than too little, to help the economy. 

Xi Jinping, China’s ruler, had disdained generous handouts to households, which he feared would undermine their self-reliance. 

National leaders had failed to get a grip on the country’s property slump, leaving it to individual cities to cobble together responses without enough help from Beijing. 

Local governments were so strapped for cash that they worsened the slowdown by cutting spending and harassing firms for fees and back taxes.

Compared with past stimulus efforts, the latest measures have been better communicated and co-ordinated, and more targeted at consumers. 

But after their sluggishness, officials will face an uphill task of reviving sentiment and spending. 

Even if all the reported fiscal measures are confirmed, they lack the necessary scale. 

To revive growth and inflation, many economists think China needs a stimulus of 7trn-10trn yuan, which would amount to 2.5-4% of GDP if spread over two years.

Officials must also say how they will stop the property slump. 

That may require the central government to guarantee the delivery of pre-sold but unfinished properties. 

It also needs to tackle the silent forests of flats that stand finished but unsold. 

Beijing wants state-owned firms to buy them and convert them into affordable homes. 

But it has not put enough money where its mouth is.

With a big enough stimulus, China’s economy would have a shot at escaping from its deflationary doldrums. 

In time, consumers might feel confident enough to spend, and companies to invest. 

China’s stimulus would also be felt around the world—but differently from in the past.

During the global financial crisis China helped revive the world economy, as the government unleashed a huge, infrastructure-heavy stimulus that stoked roaring demand for imported commodities. 

If a new package is targeted towards consumers, it will not fire up commodity markets as much. 

Instead, if Chinese households bought more cars and other manufactured goods, fewer of them would wash up in overseas markets that are fearful of Chinese competition. 

Stimulus would not just lift the spirits of shoppers at home. 

It might hearten China’s economic rivals abroad, too.