Truths vs. myths — insights on China's far-reaching incremental economic policies

An aerial drone photo shows vehicles to be transported at a railway station of CRIntermodal in Wuhan, central China's Hubei Province, Nov. 16, 2024. (Xinhua/Xing Guangli)

Since September, a range of Chinese government departments have introduced significant incremental policies aimed at bolstering economic growth. Analysts believe these policies would have profound and far-reaching implications for the Chinese economy and beyond.

These initiatives are extensive and expansive in nature, focusing on five key areas: enhancing macroeconomic counter-cyclical adjustments, expanding effective domestic demand, increasing support for enterprises, stabilizing the real estate market, and boosting the capital market.

As the global community closely observes these developments, various interpretations have emerged regarding this comprehensive policy package. However, many analyses turned out to be superficial or, in some cases, seriously misinterpreting the real goals of the policies and their unfolding effects.

To provide clarity and a more nuanced perspective, this article will discuss the policies' nature, scope, effect and outlook by introducing some key takeaways from renowned economists and experts who have a keen, sharp focus on the world's second-largest economy's past, present and future.

STRUCTURAL STRATEGY V.S. STIMULUS SHOT

Some critics argue that China has "disappointed" investors by not unveiling the new fiscal stimulus measures they had expected or contend that the policies are insufficient and merely constitute "patchwork policies."

Zhu Haibin, chief China economist at J.P. Morgan, believes that the misinterpretation of "incremental policies" is leading to distorted readings within the market, as many equate these measures to traditional stimulus policies.

He said that this policy package not only includes traditional incremental stimulus but also aims to mitigate risks and address weak links. However, some people have a one-sided understanding, viewing it solely as a stimulus measure.

Liu Yuanchun, president of the Shanghai University of Finance and Economics, said that the launch of incremental policies isn't merely economic stimulus but rather reflects the emergence of new logic and systems in China's economic policy-making, such as using robust policies to shape expectations.

Liu, elaborating on the policies' implications at a recent forum in Shanghai, said enhanced coordination between the finance ministry and the central bank on government debt management signals a transformation in fiscal and monetary policy frameworks and evolving domestic perspectives on debt and currency.

Liu said a balanced approach targeting both supply and demand highlights a concept of dynamic equilibrium in policy adjustments. There's also a growing emphasis on integrating reform initiatives with counter-cyclical measures.

Morgan Stanley Chief China Economist Robin Xing also said the policy pivot that began in September isn't merely a short-term maneuver to prop up a single quarter's economic output to hit the annual gross domestic product (GDP) target. Instead, it represents a significant recalibration of policy logic, eying a positive cycle of improved livelihood, local economic operations, and price and asset expectations.

UNPRECEDENTED SCOPE V.S. UNDERWHELMING NUMBERS

Some analysts have consistently approached the incremental policies from a numerical perspective, suggesting that China's incremental policies have been "underwhelming" and "indecisive."

Dong Yu, executive vice president of the China Institute for Development Planning at Tsinghua University, hailed the comprehensive policy package as a landmark in the country's macroeconomic management.

He said these policies' scope, depth, and intensity are unparalleled within the nation's macroeconomic governance framework, emphasizing that policy evaluation should extend beyond purely quantitative measures.

While certain policies can be measured numerically, others possess qualitative attributes that are equally significant, he said, noting that an economic policy inherently goes beyond mere numbers.

Echoing Dong's view, when analyzing China's plan for addressing local hidden debts, the macro research team at TF Securities emphasized that the primary takeaway is not the exact magnitude but rather the decisive shift to more expansionary fiscal actions.

Robin Xing said the measures unveiled thus far -- including local government debt replacement, capital market support mechanisms, and monetary and financial policy adjustments -- are just the overture to a broader policy agenda, not its conclusion.

Staff members sort packages at a logistic center of Daoxian branch of China Post in Daoxian County, central China's Hunan Province, Nov. 11, 2024. (Photo by He Hongfu/Xinhua)

SOLID SUPPORT V.S. SHAKY REMEDY

Contrary to misplaced claims that China's support policies fail to energize economic growth, a noticeable rebound in major economic indicators has shown that these policies provide solid support for a steady and sustained recovery.

In October, the first and immediate month following the introduction of incremental policies, consumption and the services sector reported strong growth data, while manufacturing activity returned to expansion.

National Bureau of Statistics (NBS) data showed that retail sales of consumer goods reported higher growth rates amid trade-in programs, and the Index of Service Production reported the highest growth rate since the start of this year. The purchasing managers' index for China's manufacturing sector came in at 50.1 in October, surpassing the boom-or-bust line of 50 for the first time since May.

The recovery momentum was also reflected in fiscal revenue, which increased 5.5 percent year on year in October, continuing its growth trajectory. Tax revenue reported growth for the first time since the start of 2024, increasing by 1.8 percent.

Meanwhile, lowered down payment ratios and mortgage rates, combined with eased restrictions on home purchases, have led to a significant increase in buyer inquiries and on-site visits. New home and second-hand home transactions grew 3.9 percent year on year in October, reversing an eight-month decline.

Further incentives, such as deed tax reductions for bigger home purchases, were introduced in mid-November. NBS spokesperson Fu Linghui predicted last week that the property market will further stabilize as support continues.

According to a global capital flow report released by Goldman Sachs, during the four weeks ending Oct. 30, the Chinese mainland's stock market saw a net global funds inflow of more than 24 billion U.S. dollars amid the market's rally since late September. In October, the average daily turnover of the Shanghai and Shenzhen bourses surged 150 percent compared to the previous month.

According to Fan Zhiyong, a researcher with the National Academy of Development and Strategy of Renmin University of China, China's raft of incremental policies was both impactful and targeted.

UPWARD TREND V.S. FRAGILE OUTLOOK

Unfazed by pessimists' repeated depiction of a fragile growth outlook, China's economy is gaining steam over intensified supportive policies. It is on track to achieve its annual growth target of around 5 percent, a relatively fast rate among the world's major economies.

October's data shows that market confidence has been boosted and business expectations have improved, Li Chao, spokesperson for the National Development and Reform Commission, China's top economic planner, said at a press conference Tuesday.

He said China's economy is expected to maintain its recovery momentum in November and December thanks to the effectiveness of its policy toolkit.

Multiple foreign institutions, including UBS and Goldman Sachs, have revised their China 2024 growth forecasts to reflect positive economic changes.

Nomura raised its forecast on China's year-on-year GDP growth in the fourth quarter to 4.9 percent from 4.4 percent recently. It said it expects the trade-in program for consumer goods to continue playing a crucial role in boosting consumption.

According to Dong Yu, the accelerated issuance and use of special-purpose local government bonds will turn into physical progress of projects, driving growth in the fourth quarter, and there have been signs of the real estate market starting to stabilize.

"In light of changes in economic performance in September and October, especially in October, we have gained further confidence in achieving this year's economic development goals," NBS Spokesperson Fu Linghui said last week.