The Global Implications of China’s Stimulus Package
The Timing of the Package
The timing of China’s new stimulus package is not coincidental. Arriving just before the 75th anniversary of the People’s Republic, the announcement was well-received by equity investors, leading to a surge of more than 15% in the country’s main stock indices.
A Historical Context
The new package is reminiscent of the four trillion yuan (US$568 billion) stimulus China introduced in late 2008 to shield its economy from the 2008-10 global financial crisis. That earlier package successfully made China one of the only major economies that did not suffer a severe recession, and in fact raised China’s real gross domestic product growth to 10% in 2010. It also provided a much-needed boost to global demand for other countries.
The global impact of China’s stimulus package will hinge on several key factors, including its size and reach, its success in enhancing domestic growth, and the strength of the country’s economic ties to other countries.
The current stimulus package consists of three main components. First, it increases liquidity by reducing baseline interest rates by 20 basis points, mortgage rates by 50 basis points, and commercial banks’ required reserve ratio by 50 basis points. Second, it seeks to revive the real-estate sector by lowering the minimum down payment on new home purchases. This is complemented by additional measures from local governments to boost demand for home purchases. Third, new fiscal measures, to be rolled out soon, will likely include cash transfers to low-income households and families with young children.
The recent surge in Chinese stock prices could reflect expectations of higher inflation, which would raise nominal profits, and anticipation of stronger corporate and economy-wide fundamentals. The two components have different implications for China’s economy and the rest of the world.
A successful stimulus package could lead to positive spillovers to the global economy, particularly for countries that are deeply integrated with China’s economy. The positive spillovers would be greater if driven by stronger Chinese economic fundamentals than just higher nominal prices. Among developed economies, Australia and South Korea are likely to benefit the most from an economic rebound in China, especially if it includes a partial recovery in the real-estate sector.
Countries that produce luxury products or attract Chinese tourists, such as France and Italy, could benefit significantly in the coming months, including around the next Chinese New Year in late January. The US is expected to experience more limited gains this time, owing to the many trade restrictions and technology export bans that it has imposed on China in recent years. Japan was a major beneficiary of China’s 2008 stimulus package and may benefit from this new package as well.
China’s stimulus package is an important first step in reviving its economy. To unlock its long-term growth potential, China must also implement more structural reforms, including further improvements in the business climate for all firms, especially non-state-owned and foreign firms. Such reforms would encourage entrepreneurs to invest and innovate more, and motivate households to spend more. Stronger Chinese growth would not only make its citizens better off but also generate greater positive spillovers for the rest of the world.
FAQs
* What are the key components of China’s stimulus package?
The package consists of three main components: increasing liquidity, reviving the real-estate sector, and new fiscal measures.
* How will the package impact the global economy?
A successful stimulus package could lead to positive spillovers to the global economy, particularly for countries that are deeply integrated with China’s economy.
* Which countries are likely to benefit the most from China’s economic rebound?
Australia and South Korea, as well as countries that produce luxury products or attract Chinese tourists, such as France and Italy, are likely to benefit significantly.
* How will the US be impacted by China’s stimulus package?
The US is expected to experience more limited gains this time, owing to the many trade restrictions and technology export bans that it has imposed on China.