China’s latest economic stimulus package has captured global attention, but it raises more questions than it answers. Beijing has announced a series of measures, from interest rate cuts to liquidity injections and the recapitalisation of banks, but the package lacks the kind of fiscal muscle required to truly address the nation’s economic challenges. These measures fall short of the scale needed to reboot China’s slowing economy, and, more importantly, they seem to miss the underlying structural issues plaguing key sectors like real estate and local government debt. China’s stimulus package, while significant on paper, is little more than a band-aid solution to deeper structural issues.
The People’s Bank of China (PBoC) recently announced a 20-basis-point policy interest rate cut, a move that appears significant at first glance. However, PBoC Governor Yi Gang clarified that this is likely the extent of what can be done. The rate cut was designed to stimulate lending, but the bank is constrained by the need to keep its own financial institutions profitable, which makes deeper cuts unlikely. Additionally, the rate cuts pass through faster to loans than deposits, which does little to incentivise household consumption — a critical issue for China’s domestic economy.
Beyond this, there is the 50-basis-point reduction in the required reserve ratio (RRR), which could inject approximately 1 trillion yuan into the financial system. However, because the PBoC controls short-term rates, this liquidity may never reach the real economy. In fact, much of this excess liquidity is expected to be absorbed in the coming weeks due to the end of the holiday period, negating its potential impact.
Other aspects of the stimulus package include a cut to mortgage rates, intended to lower borrowing costs and save households around 150 billion yuan annually in interest payments. Yet this is hardly new — similar measures were enacted last year with no significant impact on the broader economy. Moreover, China’s real estate market, which has been in a tailspin, is unlikely to recover simply due to lower mortgage rates. Previous efforts to reduce down payment requirements and stimulate second-home purchases have failed to generate the intended rebound in home sales, and the current measures are unlikely to fare better.
On the fiscal side, China is planning to recapitalise its six largest banks, infusing around 1 trillion yuan. However, these banks are not the ones struggling; they are already well-capitalised, so this move is unlikely to have any macroeconomic impact beyond boosting their stock prices. In contrast, China’s smaller, regional banks — which are under significant stress due to bad loans and local government debt — continue to face challenges that this recapitalisation plan does nothing to address.
Another element of the package is the idea to issue special bonds to refinance local government debts, rumoured to be in the range of 1 trillion yuan. But with over 65 trillion yuan in off-balance-sheet local government debt, this is merely a drop in the ocean. The debt overhang at the local level continues to drag down public investment, and this incremental bond issuance is unlikely to resolve the deeper fiscal pressures facing Chinese local governments.
One of the more unusual components of the package is the PBoC’s establishment of a 500 billion yuan facility that allows institutional investors to swap higher-risk assets for safe ones, effectively increasing their leverage to buy more stocks. Additionally, a 300 billion yuan re-lending window has been opened to encourage banks to finance the repurchase of stocks by listed companies. While these measures might prop up the stock market, they do little for the real economy. Relying on a stock market bubble to boost household sentiment and drive consumption is a risky strategy, especially when corporate earnings fail to justify rising stock prices.
These measures seem more focused on saving face and supporting China’s banks than on addressing the root causes of its economic slowdown. Local government debt remains an enormous issue, the property market is far from recovery, and household consumption is weak. China’s strategy, particularly the efforts to buoy the stock market, might temporarily improve investor sentiment, but they do little to provide the long-term economic stimulus the country needs.
For India, the lesson here is clear: don’t prioritise stock market valuations; pursue faster, sustainable growth that addresses both short-term and long-term challenges. India’s economic journey should not be seen merely as an alternative to China’s; rather, it must establish itself as a global economy that attracts investment based on its own merits.
A key takeaway for Indian states is the need to control spiralling state debts and build their own economic resilience. By focusing on fiscal discipline and sustainable financial management, Indian states can enhance their attractiveness for investment and job creation. Instead of following China’s path of piling on local government debt to finance short-term growth, states must prioritise structural reforms and infrastructure development to build a stable and competitive business environment.
The emphasis should be on boosting infrastructure, improving governance, and ensuring that regulatory frameworks are robust enough to withstand global shocks. India must focus on strengthening its manufacturing base, supporting small businesses, and fostering domestic demand. China’s experience shows that without addressing deeper issues like local government debt, weak consumer sentiment, and an over-reliant property sector, economic packages risk becoming stop-gap solutions rather than catalysts for real recovery. By learning from these missteps, India can position itself as a sustainable, investment-friendly global economy.
