Caution to Bold Stimulus
Under the leadership of Xi Jinping since 2012, China's economic policy has been characterized by two distinctive principles: a disdain for consumer handouts and a reluctance to implement aggressive economic stimulus measures. Xi's reasoning behind these approaches is rooted in a concern that direct financial aid fosters dependency and laziness, and that bold stimulus packages, like those introduced during the global financial crisis of 2008, should be used sparingly. However, the persistent economic challenges faced by China in recent times have forced Xi to reconsider his stance. As China celebrated the 75th anniversary of its founding, the government unveiled its most significant economic stimulus since 2008, sending shockwaves through global markets.
The Latest Economic Stimulus
On September 24th, the People’s Bank of China (PBoC), China's central bank, took a series of aggressive measures aimed at reinvigorating its sluggish economy. These included reducing interest rates, lowering banks' reserve requirements, and introducing steps to ease mortgage costs for households. The central bank estimated that these adjustments would save approximately 50 million households around 150 billion yuan ($21 billion) annually. PBoC Governor Pan Gongsheng signaled that more reserve requirement cuts could follow before the end of the year.
In addition to these conventional economic measures, the central bank introduced two unconventional tools designed to prop up the stock market. First, it promised to assist companies in buying back their own shares by refinancing loans for that purpose. Second, the PBoC announced plans to bolster institutional investors—such as securities firms and insurers—by allowing them to borrow government bonds using riskier assets, such as stocks, as collateral. The total value of these new tools amounted to 800 billion yuan, but Pan hinted that this figure could be doubled or tripled if necessary.
These initiatives marked a significant shift in China’s economic strategy, as they went beyond previous policies of cautious intervention. The central government’s urgency was also reflected in the Politburo’s decision to devote a September meeting entirely to the economy, diverging from its usual political agenda. For the first time, the Politburo acknowledged the need to address the struggling property market and pledged to make more effective use of countercyclical measures to combat economic downturns.
Addressing Local Debt and Stimulation Consumption
One of the most notable aspects of the new stimulus package is the planned issuance of 2 trillion yuan in bonds, equivalent to about 1.5% of China’s GDP. This additional borrowing will be directed toward two key areas: reducing the risk of local government defaults and stimulating household and business spending. Local governments in China have long been under financial strain, and half of the bond proceeds will be used to stabilize their finances.
The other half of the funds will be channeled into existing programs, such as the "cash for clunkers" initiative, which incentivizes companies and households to replace outdated equipment, vehicles, and appliances with more energy-efficient alternatives. Notably, part of this money will also go toward providing monthly allowances to families with more than one child, a new policy aimed at encouraging population growth. Families will receive around 800 yuan per child beyond the first, benefiting approximately 114 million children, according to census data. This is a departure from China’s previous aversion to handouts, now viewed as a potential driver of both economic activity and population growth.
Despite the scale of these interventions, they pale in comparison to the massive stimulus unleashed during the 2008 financial crisis. That package, often referred to as the "4 trillion yuan" stimulus, ultimately expanded to 9.5 trillion yuan, or 27% of GDP, over a span of two years. Nevertheless, the measures announced in September exceeded market expectations, with stock markets reacting strongly to the news. Chinese equities saw their best week in 16 years, and Hong Kong's markets experienced their largest surge since 1998. Even some American investors expressed optimism about the new policies.
The Soviet Union’s Shadow
As China’s leadership navigates this economic short boom, Xi Jinping’s concerns extend beyond the economy. As China celebrated the 75th anniversary of the Communist Party's rule, there were muted reminders of another significant milestone: the collapse of the Soviet Union after 74 years in power. The longevity of the Chinese Communist Party now surpasses that of its Soviet counterpart, but Xi has consistently warned against complacency, fearing that internal weaknesses could one day lead to a similar downfall.
The collapse of the Soviet Union remains a cautionary tale for China's ruling elite. In his speeches, Xi frequently references the dangers of weakening ideological discipline, warning that prosperity can erode the vigilance needed to sustain the Party’s rule. Despite his 12 years in power, during which he has launched numerous purges of potential rivals and intensified ideological control, Xi remains unsatisfied with the Party’s internal cohesion.
Since 2022, the specter of Soviet collapse has reappeared in state media and Party meetings, reinforcing Xi’s warnings about the risks of "historical nihilism." This term, used to denounce criticism of the excesses of Stalinism and Maoism, is a key component of the Party’s propaganda, emphasizing the importance of ideological purity. Xi has also stressed the need for Party members to avoid forming factions or cliques, warning that such internal divisions could weaken the Party from within.
In contrast to the economic reforms pursued by Deng Xiaoping, which some saw as a departure from strict Marxist principles, Xi's focus has been on strengthening the Party's organizational structure and ideological unity. He has made efforts to expand the Party’s influence in private enterprises and has crushed civil society groups, which he views as potential threats to Party authority, drawing lessons from the Soviet experience.
A Fragile Balance
China’s latest economic stimulus represents a significant departure from Xi Jinping’s traditionally conservative approach to fiscal and monetary policy. While it may not match the scale of the 2008 stimulus, it has already boosted market confidence and sent a powerful signal to investors. However, the broader challenges facing China’s leadership—ranging from economic stagnation to the ever-present fear of internal Party decay—remain substantial.
As Xi grapples with these challenges, the lessons of the Soviet Union loom large in the Party’s collective memory. Despite the bold steps taken to revive growth, Xi’s focus on maintaining ideological and organizational discipline within the Party suggests that he is acutely aware of the fragile balance required to sustain one-party rule in an increasingly complex world. In China, as in the Soviet Union before it, the greatest threat to the ruling party may come not from external forces, but from within.
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