As communist China turns 75, can Xi fix its economy?

As China approaches the significant milestone of its 75th anniversary, the ruling Communist Party is taking steps to address the challenges facing its economy. In preparation for the upcoming Golden Week holiday, the government has introduced a series of measures aimed at revitalizing the economy, which has been struggling in recent times. These measures include support for the troubled property sector, initiatives to bolster the stock market, cash assistance for low-income individuals, and increased government spending. Following the announcement of these plans, stock prices in both mainland China and Hong Kong experienced substantial gains, marking a positive response from investors. However, many economists express skepticism about whether these measures will be sufficient to resolve the underlying issues plaguing China's economy. On September 24, the People's Bank of China (PBOC) unveiled new strategies specifically designed to support the beleaguered stock market. Among these initiatives is a funding program worth 800 billion yuan, approximately 114 billion dollars, which can be accessed by insurers, brokers, and asset managers to purchase shares. Additionally, PBOC Governor Pan Gongsheng indicated that the central bank would provide assistance to publicly listed companies seeking to repurchase their own shares, while also announcing plans to reduce borrowing costs and enable banks to expand their lending activities. Just two days after the PBOC's announcement, President Xi Jinping convened an unexpected meeting of the Politburo, the country's top leadership group, to discuss economic matters. During this meeting, officials committed to increasing government spending to support economic growth. On the eve of the weeklong holiday, the Shanghai Composite Index surged by over 8%, marking its most significant single-day increase since the global financial crisis of 2008. This surge capped off a five-day rally that saw the index rise by 20%. The following day, with mainland markets closed, the Hang Seng Index in Hong Kong also climbed by more than 6%. According to China analyst Bill Bishop, investors reacted positively to the announcements. While the stock market's response was enthusiastic, President Xi faces more profound challenges that require attention. The 75th anniversary of the People's Republic of China signifies that it has outlasted the Soviet Union, which collapsed 74 years after its establishment. This historical context raises concerns among Chinese leaders about avoiding a similar fate. Alfred Wu, an associate professor at the Lee Kuan Yew School of Public Policy in Singapore, notes that maintaining confidence in the broader economy is crucial, especially as there are growing worries that China may fall short of its annual growth target of 5%. Yuen Yuen Ang, a professor of political economy at Johns Hopkins University, emphasizes that meeting targets is of utmost importance in China, and failing to achieve them in 2024 could exacerbate the current cycle of slow growth and diminished confidence. One of the primary factors hindering China's economy is the ongoing downturn in the property market, which has persisted for three years. In addition to measures aimed at boosting the stock market, the recently announced stimulus package also includes initiatives to support the real estate sector. These measures encompass increased bank lending, reductions in mortgage rates, and lower minimum down payments for second-home buyers. However, skepticism remains regarding the effectiveness of these actions in revitalizing the housing market. Harry Murphy Cruise, an economist at Moody's Analytics, argues that while these measures are welcome, they are unlikely to bring about significant change on their own. He asserts that the root of China's economic weakness lies in a crisis of confidence rather than a lack of credit; businesses and households are reluctant to borrow money, regardless of how low interest rates may be. During the Politburo session, leaders pledged to go beyond mere interest rate cuts and utilize government funds to stimulate economic growth. However, despite prioritizing objectives such as stabilizing the property market, supporting consumer spending, and boosting employment, officials provided limited details regarding the scale and scope of government spending. Qian Wang, chief economist for the Asia Pacific region at Vanguard, cautions that if fiscal stimulus falls short of market expectations, investors may be left disappointed. Furthermore, she notes that cyclical policy stimulus alone cannot address the structural problems facing the economy. Economists emphasize that addressing entrenched issues within the real estate market is essential for improving the overall economy. Property represents the most significant investment for many families, and declining house prices have eroded consumer confidence. Sophie Altermatt, an economist with Julius Baer, highlights the importance of ensuring the delivery of pre-sold but unfinished homes. To foster sustainable domestic consumption, she argues that fiscal support for household incomes must extend beyond one-time transfers and instead focus on enhancing pension and social security systems. The recent bankruptcy of Evergrande, one of China's largest property developers, underscores the challenges facing the sector. On the day of the 75th anniversary, a state-controlled newspaper, People's Daily, adopted an optimistic tone, acknowledging that while the road ahead may be difficult, the future holds promise. The article emphasized that concepts introduced by President Xi, such as 'high-quality development' and 'new productive forces,' are crucial for unlocking a brighter future. This focus reflects Xi's desire to transition away from the rapid growth drivers of the past, such as property and infrastructure investment, and instead cultivate a more balanced economy centered on advanced industries. However, experts caution that the old and new economies are deeply interconnected; if the old economy falters too quickly, it could impede the progress of the new. This realization has prompted the leadership to respond accordingly.