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| A customer selects tomatoes in the vegetable section of a supermarket in Beijing, China. China is struggling to recover its growth rate due to a prolonged slump in the property market, weak domestic demand and trade conflicts with the United States and Europe. |
In 2024, China has once again rolled out an economic stimulus package, but the market reaction has been underwhelming. This has been a recurring theme, with recent Chinese stimulus measures consistently failing to spark much excitement among investors. Yesterday’s announcement targeted the struggling real estate sector, but the response from the market has been lukewarm at best, reflecting broader skepticism about the effectiveness of China's recent economic policies.
Key Focus of the Real Estate Measures - More of the Same
The crux of the new real estate policy is to extend more loans to real estate companies suffering from severe cash shortages. However, this is not a blanket bailout for all companies—only those that meet specific criteria will be eligible for financial assistance. The problem is that this isn’t a new approach; the Chinese government has already been implementing similar measures since the start of the year.
In fact, two years ago, it was the Chinese government itself that restricted lending to real estate firms, sparking the collapse of several major players in the sector. Now, the latest policy merely increases the amount of credit available to struggling companies, allowing more firms to qualify for loans. However, because the policy is largely an extension of existing efforts, it failed to inspire confidence in the market. This disappointment was reflected in the performance of the Chinese stock market, which ended yesterday's session lower.
Stabilizing the Market Rather Than Reviving It
It seems the primary goal of these new real estate measures is not to rejuvenate the real estate market but to prevent it from further deterioration. Some analysts speculate that the timing of this announcement is tied to China’s upcoming third-quarter GDP growth figures, which are expected to be released today.
China set its GDP growth target for 2024 at 5%, but with 5.3% growth in the first quarter and 4.7% in the second quarter, meeting this target requires a strong performance in the latter half of the year. However, expectations for the third-quarter growth rate are below the 5% mark, prompting speculation that the government rushed to introduce a new real estate stimulus to manage market expectations ahead of the data release.
Banks Under Pressure and Concerns Over Loan Capacity
One of the key challenges facing the new policy is whether Chinese banks can actually handle the additional lending. The government’s plan calls for approximately $340 billion (or 340 trillion won) in new loans over the next three months. However, Chinese banks are already facing substantial difficulties.
Loan margins—the difference between interest earned on loans and paid on deposits—have been shrinking. In fact, net interest margins for Chinese commercial banks reached historic lows in the second quarter of 2024. This has left many banks with little capacity to lend more, especially as they are already grappling with risks associated with the real estate sector. Extending even more loans to struggling real estate firms increases the likelihood of future non-performing loans, further weakening an already stressed financial system.
Market Disappointment and Policy Fatigue
In essence, the Chinese government’s new real estate policy has done little to impress investors, who were hoping for something more significant. Instead of reviving market confidence, the policy has raised concerns about the growing risks to China’s banking sector. With the real estate market still in a prolonged slump, there’s skepticism about whether this approach will yield any meaningful recovery.
Strong, decisive policy action isn't always the best option, but looking at past examples, such as Japan, it’s often better to surprise the market with bold, impactful measures. Gradual, incremental policy shifts risk losing market momentum, and even when a strong policy does eventually arrive, it may no longer have the desired effect if investors have already grown fatigued by repeated disappointments.
While the Chinese government may have its reasons for proceeding cautiously, the market appears to be signaling that it’s time for something more substantial. If they continue to drip-feed measures, they might find that the market becomes increasingly unresponsive, even to the most well-crafted policies.