Since the global pandemic reshaped economic dynamics, China—once the unstoppable growth engine of the world—has been grappling with sluggish growth and severe systemic challenges. In response, China’s finance ministry recently announced a comprehensive stimulus package aimed at resuscitating its ailing economy, which has been weighed down by a perfect storm of real estate sector woes, faltering consumer confidence, and global headwinds. Commodity prices and the Chinese stock market have rallied in response, however, the question remains whether this intervention will be enough to reignite the country’s growth. ABSI this week is taking a look at China’s economic stimulus package.
It is important to appreciate, China emerged from the first wave of the COVID-19 pandemic with an aggressive growth agenda, seemingly bouncing back faster than other major economies in 2020. Its stringent lockdown policies helped mitigate the worst effects of the virus domestically, but they also led to supply chain disruptions and a sharp contraction in domestic consumption. Meanwhile, the rapid expansion of the credit-fueled real estate market, which had been a cornerstone of China’s economic success for years, began to show cracks.
Source: AFR
The property sector—responsible for around 30% of China’s GDP—has been at the epicentre of the economic slowdown. Major developers like Evergrande and Country Garden have struggled with massive debt loads, resulting in defaults, stalled projects, and a sharp drop in housing sales. This situation has worsened as property prices fell and consumer confidence waned, creating a feedback loop of declining investment, job losses in construction-related industries, and weaker spending.
Further complicating the picture has been the Chinese government's "zero-COVID" policy, which stifled growth for an extended period, particularly in services and retail. Even after abandoning the strict pandemic controls, consumer spending failed to fully recover. This has exacerbated a shift in the growth model, as the Chinese middle class—once seen as a beacon of potential consumption growth—has tightened its purse strings amid job insecurity and rising cost-of-living concerns.
Recognising the severity of the situation, China’s finance ministry announced a raft of stimulus measures in late September and early October 2024 aimed at boosting demand and preventing a prolonged economic slowdown. The package contained a combination of fiscal spending, targeted tax cuts, and an easing of monetary policy, however what it lacked was putting a spending target on the stimulus.
China Shanghai Composite Stock Market Index
Source: Koyfin
The announcement of the stimulus was met with mixed reactions in global financial markets. Domestically, Chinese equity markets rallied briefly, but the enthusiasm was tempered by scepticism over the sustainability of the measures. China's growth target for 2024—previously revised down to 5%—still remains ambitious in the face of structural challenges, particularly in the property sector.
Despite the lack of details, any attempt to stimulate the Chinese economy has direct implications for commodity prices, from energy to metals to agricultural goods. Specifically we have seen price rallies in iron ore, copper aluminium, and other industrial metals. Putting a spotlight on the iron ore, prior to stimulus announcements, Australia’s largest export was trading as low as US$90/t but has since rallied to ~US$107/t and with the potential to move much higher in the wake of more stimulus details.
Iron Ore 62% Fe Futures Price
Source: Koyfin
While the stimulus measures are applauded, China still faces significant obstacles in translating this intervention into sustained growth. The property sector, despite receiving support, is unlikely to return to its previous heights, as consumers remain wary of further declines in housing prices. Additionally, local governments—facing mounting debts—may struggle to fully implement new infrastructure projects, limiting the efficacy of the stimulus package.
Long-term, China must address more fundamental challenges, such as its over-reliance on property-led growth, demographic shifts, and the need for economic rebalancing, if it hopes to sustain its position as a global economic powerhouse. In the meantime, markets will be watching closely to see whether this latest stimulus round can deliver the growth China so desperately needs.
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