The China stimulus from the ground

The recently unveiled stimulus package in China represents a new normal for the economy as it looks to address ongoing growth headwinds.

Chinese authorities have announced a number of measures to address the economy’s challenges in recent weeks. It’s certainly the broadest range of Chinese departmental efforts I have seen.

Future annual growth in the region of 3 per cent to 5 per cent is going to require continued policy effort amid twin drags from shifting demographics and growing debt.

This package is different from similar efforts seen during the global financial crisis in 2008, although the scale in pure renminbi terms has now reached similar levels. The GFC stimulus rolled out over a short period time, while some of the contemporary measures will take place over as much as three years.

That era’s stimulus was demand-focussed, while the modern is targeted mostly at balance sheets. The design of today’s measures seem to be aimed at putting a floor under growth, rather than generating a big upswing.

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Impact

I spent a week in China, and the stimulus was all people based offshore wanted to talk about. But there was much less discussion among the onshore business community than I expected.

The breadth of individual announcements shows this is a very real stimulus and a very real policy effort. But businesses are taking a wait-and-see approach.

Most discussion was about what will be required to spark consumption, which will inevitably become a larger part of conversation than industrialisation. Most expect China will need to lift the consumption share of gross domestic product from its current levels of about 50 per cent.

Simply put, if China wants to sustain growth at 5 per cent in real terms, with a shrinking population, it needs to grow consumption per capita materially faster than 5 per cent. In the decades ahead, consumption is likely to attract a much greater policy focus than it has previously.

House prices have been falling and housing makes up 60 per cent of household balance sheets. The policy effort needs to work against that drag.

The policy package is likely to begin stabilising the housing sector over the next year or so. But with a shrinking population, the days of China reporting rising house prices and surging construction are almost certainly behind us.

Whatever happens, China is still an $US18 trillion economy - but growth is much slower than it has been for much of the past two decades.

Richard Yetsenga is Chief Economist at ANZ Institutional