Can Chinese government save its faltering economy?| China Truths

Welcome to China Truths. Today we will take a look at China's faltering economy and whether its government can turn it around. China unveils sweeping stimulus plan amid faltering economy. Goldman Sachs and Citigroup downgrade China's 2024 growth forecast to 4.7%. China Auto Association flags $19 billion loss in emergency report. Now, let's dive into the details. It's all covered in today's China Truths. China unveils sweeping stimulus plan amid faltering economy. China's central bank authorities announced rate cuts and aggressive deflationary measures on September 24 amid a slowing economy. However, the stimulus plan has been criticized by some experts who say the latest measures are a short-term fix and fail to address the underlying issues affecting the economy. Governor Pan Gongxing of People's Bank of China PBOC said at a press conference that the bank is lowering the bank's reserve requirement ratio RRR by 50 basis points, which will free up about 1 trillion yuan or about $142 billion for new lending. Pan said that the RRR may be further lowered by 0.25 to 0.5 percentage points later in the year, depending on the market liquidity situation. Commercial banks will soon reduce interest rates on existing mortgages by an average of 0.5% or around 150 billion yuan, which is about $21 billion, to provide relief to some 50 million households. Home minimum down payments will also be lowered from 25% to 15% for second-home buyers. The central bank is also cutting the seven-day reverse repo rate, or the interest it pays to commercial banks when borrowing money, by 0.2% to 1.5%. Pan said this should have the effect of lowering medium-term lending rates by about 0.3% and loan prime rates and deposit rates by 0.2 to 0.25%. The central bank will also allow commercial banks to use 100% up from 60% of the 300 billion yuan or about $43 billion the central bank made available to finance loans for affordable housing. Wu Qin, chairman of China Securities Regulatory Commission CSRC, said at the briefing that the commission will issue guidance for medium- and long-term funds to enter the market and take measures to promote mergers, acquisitions, and reorganizations. The CSRC will also support the state-funded Central Huijin Investment and Stock Purchases to expand investment scope and support new index products. The PBOC is also backing two new programs with 800 billion yuan or about $114 billion. One swap program of 500 billion yuan or about $71 billion will allow funds, insurers, and brokers easier access to funding to buy stocks, and the other 300 billion yuan will be used in loans for commercial banks to help fund listed company share purchases and buybacks. Global analysts have recently posted pessimistic outlooks on China's economy. Last week, Goldman Sachs and Citigroup scaled down their growth forecast for China this year to 4.7% after the Chinese government released its sluggish August economic data. Due to China's past record of underreporting and covering up data, it has become more difficult for Western institutions to assess the true state of the Chinese economy, which, according to analysts, could be far worse than what Beijing acknowledges. Analysts pointed out that the new measures inject liquidity into the market but do not support actual economic activity. Capital economics analyst Julian Evans-Pritchard said this is the most significant PBOC stimulus package since the early days of the pandemic. But on its own, it may not be enough. An aggressive fiscal policy is required to inject genuine economic demand, ANZ analysts said in a note on the PBOC moves, which they described as far from being a bazooka. Rocky Fan, an economist at Guillian Securities, said the measures were appropriate but somewhat unexpected and would only provide a short-term boost to the economy by stimulating consumption. Fan said we haven't seen yet strong fiscal policies, given the ongoing cleanup of hidden local government debts, so monetary policies are expected to play a dominant role in maintaining gross demand. Kung Go, head of Asia Research for ANZ in Singapore, said Beijing was expected to announce stimulus measures, but this plan was broader than analysts anticipated. He said the measures are designed to not only lower borrowing costs but also to inject more liquidity into the economy and boost the equity market. However, Go said the measures did not address the underlying issues plaguing China's economy. He said, whether or not it is sufficient to address some of the underlying issues, particularly around the lack of confidence in the economy, I think still remains to be seen. Kelvin Wong, senior markets analyst with Owanda in Singapore, said he saw mixed reactions to this stimulus package as there is some fear of a liquidity trap if the new monetary policy is not matched with expansionary fiscal policies. He said, this extra liquidity is not being channeled to boost internal demand, which, in turn, could not see a turnaround in the current state of feeble consumer and business confidence in China. China's economy has suffered from two major shocks in recent events due to its government's policies. During the COVID-19 pandemic, the government's draconian lockdown measures led to a dramatic decrease in exports, a sluggish stock market, and record-high unemployment rates. The real estate development industry, which bolstered China's growth as an economic power, has also collapsed, with major development groups being taken to court by investors petitioning for liquidation in hopes of recovering a fraction of their assets. Economist Davy Jay, Wong previously told the Epoch Times that Western institutions often misunderstand China's data. He said, they generally do not understand the government's economic structure and often view it from the perspective of Western economics rather than a perspective that acknowledges the hidden roles of the operation of the socialist economy with Chinese characteristics. For example, Wong said, this mismatch can be seen in the difference between the state-owned economy's development and growing market share versus the deterioration of private sector, with underemployment rates he estimates to be more than 25%. Goldman Sachs and Citigroup downgrade China's 2024 growth forecast to 4.7%. Goldman Sachs and Citigroup have scaled down their growth forecast for China this year to 4.7% in recent days after the Chinese government released its sluggish economic data for August. The Chinese ruling party's official annual 5% growth rate set for this year is unlikely to be achieved. According to analysts, because of the government's increasing lack of transparency and falsification of data, it has become more difficult for Western institutions to know the real situation of the Chinese economy, which could be much worse than what the Chinese government is admitting. China's National Bureau of Statistics released data on September 14 showing that the industrial output increased by 4.5% year-over-year in August, slower than the 5.1% year-over-year increase in July, marking the lowest growth rate since March. Retail sales, another important economic indicator for domestic consumption, grew by 2.1% year-over-year, lower than the 2.7% rate in July. Fixed asset investment growth reached the lowest rate this year at 3.4%. All of the above data were lower than forecast. Earlier this year, Goldman Sachs forecast that China's full-year economic growth rate would reach 4.9%, while Citigroup forecast growth at 4.8%. Japanese firm Mizuho Securities also downgraded China's economic growth rate this year. On September 13, it reduced its growth forecast to 4.7% from 4.8%. Goldman Sachs expected China's 2025 gross domestic product, or GDP growth, to be at 4.3%. Citigroup on September 15 reduced its 2025 forecast for China's GDP growth to 4.2% from 4.5% because of continuing weak domestic demand. Regarding the international rating agency's downgrade of China's economic forecast, Chinese-American economist Davy Jay Wong told the Epoch Times that the Chinese government's official data is inaccurate, unclear, and lacks details and that international investment banks are making a downward revision as a hedge against risk. The Chinese government has further obscured China's economic information recently. Data related to land sales, foreign exchange reserves, and bond trading have been restricted. In August, the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect stopped publishing real-time northbound trading data for foreign capital, making it more difficult to gauge the withdrawal of foreign capital from China. He said China's real economic situation could be much worse than what the official data show, noting that although the state-owned economy is still developing with a growing share of market monopoly and some non-tax revenues are increasing, the private sector is deteriorating. Sun Guoxiang, professor of international affairs and business at Nanhuai University in Taiwan, told the Epoch Times that international investment banks' downgrading of their economic growth forecasts for China reflects the view that the Chinese economy is facing great challenges. He said that although the official positive growth data show that some sectors of the economy, such as solar and photovoltaic panels, are still expanding, some industries may have negative growth, and the actual economic situation may be worse. Sun said because China's statistical data are often manipulated according to government policies, the growth data released by various provinces have the same problem. He said government officials falsify data to avoid upsetting the country's leader, Xi Jinping. Sun said, therefore, under the current circumstances, the economic growth numbers may be more symbolic than substantive and cannot reflect the true situation of the Chinese economy at all. W. Paul Chu, professor at the department of finance at Northeastern University in Boston, told the Epoch Times that China's private consumption accounts for less than 40 percent of the overall economy, compared with 70 percent in the U.S. economy. He said, the largest share of China's economy is investment, which is mainly made by companies with government connections, accounting for about 40 percent of the country's economy. Chu said the latest data show that China's investment and consumer confidence are both declining. He added, fixed capital investment in the first eight months was 3.4 percent, which means that China's economy is in a serious state. According to Chu, it's meaningless to use the economic growth rate as an indicator to study China's development. Instead, it should be measured from the perspective of people's welfare. He said, what really matters to the well-being of the people is some social infrastructure, such as social security, care for the elderly, family support, helping the people's livelihood, or improving the medical system and the education system. Now, let's take a look at one of the biggest industries in China's economy, the automobile. China Auto Association Flags $19 Billion Loss in Emergency Report The China Automobile Dealers Association, CADA, filed an emergency report on September 23, reporting 138 billion yuan or $19.55 billion in losses in the first eight months of 2024. Car dealers were forced to sell new cars at steep discounts, and the august discount rate stands at 17.4 percent. The association warned authorities that car dealerships now face shutdowns and called for more financial support. In a statement on CADA's WeChat account, it said that inventories are high while consumption is low, resulting in discounted sell-offs of new cars. CADA blamed capital chain rupture for the disruption to the industry, not operational issues. The car dealership industry is just the latest in China to be hit by cash flow issues. Car sales in China fell for five straight months, from April to August, though electric and hybrid vehicle sales rose due to subsidies and trade-in deals. China Grand Automotive Services, China's second-largest car dealership, was removed from the Shanghai Stock Exchange last month after its stock traded at less than face value for 20 consecutive days. Other countries are putting up guardrails against China's auto oversupply crisis. On September 23, White House economic advisor Lyle Brainerd said safeguards were needed against China's auto trade practices. Brainerd said at the Detroit Economic Club, China is flooding global markets with a wave of auto exports on the back of their own overcapacity. We saw a similar playbook in the China shock of the early 2000s that harmed our manufacturing communities, and this administration is determined we will not see a second China shock. The United States imports few cars from China, but many car parts. Mexico is the top supplier of imported cars in the United States. Still, Mexico uses many Chinese car parts, and many Chinese companies have moved to Mexico, according to the Alliance for American Manufacturing. We're going to need to work with our partners Canada and Mexico to address China's overcapacity Brainerd said, referring to a review of the U.S.-Mexico-Canada trade agreement for 2026. She said U.S. officials are already in talks with their Mexican counterparts, and they share concerns about China using Mexico as a platform to ship into the United States at artificially low prices. The European Union has also taken action against low-priced Chinese electric vehicles being dumped in the European market and announced tariff hikes in July. The European Commission has already rejected proposals by Chinese manufacturers to set a floor for car prices as an alternative to tariffs and will vote on the final tariff rates next month. Don't forget to comment in the section below to share your opinions on today's topic with us. Make sure to like and subscribe to see more interesting topics from China Truths.