Commentary: How the World Stands to Gain From China’s Stimulus Package

China's recent stimulus package is strategically timed just before the 75th anniversary of the People's Republic of China. Its announcement has led to a significant surge of over 15% in China's main stock indexes. This economic measure is reminiscent of the large-scale 4 trillion yuan stimulus introduced in 2008, which helped shield China from the global financial crisis and remarkably boosted its GDP growth to 10% by 2010 [para. 1][para. 2].

The previous stimulus of 2008 not only supported China's economy but also bolstered global demand, assisting other countries like the United States, Japan, South Korea, and nations in Southeast Asia. Australia's economy notably avoided recession partly due to China's economic interventions [para. 3]. The current global impact of the new stimulus depends on its size, reach, and effectiveness in bolstering domestic growth amidst China's connections with other economies [para. 4].

The new stimulus package encompasses comprehensive measures beyond what the Governor of the People's Bank of China mentioned. Key components include: reducing interest rates and commercial banks' reserve ratios to increase liquidity, reducing mortgage rates, reviving the real estate sector through lowered down payments, and expected fiscal measures like cash transfers for low-income households [para. 5].

China's stock market surge could reflect expectations of higher inflation as well as improved corporate fundamentals. These factors could differ in their implications for China's economy and its global trade partners. A rise in inflation is currently seen as beneficial to counter the risk of a debt-deflation spiral, an issue China was argued to address with a stimulus a year earlier [para. 6][para. 7].

Market reactions indicate investors' confidence in the Chinese government's bold economic measures, potentially leading to stronger economic growth in the final quarter of 2023 and into 2024. A positive ripple effect on the global economy could be realized if China's fundamental growth translates into greater consumer and investment spending [para. 8][para. 9]. Countries like Australia and South Korea stand to gain notably if the real estate sector recovers, benefiting from increased demand for commodities and industrial exports. Additionally, luxury product economies and tourism hotspots like France and Italy could see heightened Chinese consumer spending [para. 10][para. 11].

Conversely, the United States might experience limited economic gains this time around, primarily due to existing trade barriers and technology export bans in place against China. While Japan had previously reaped benefits from China's 2008 stimulus, current response has been modest possibly due to leadership concerns overshadowing anticipated economic benefits [para. 12][para. 13].

For developing countries, particularly those intertwined in Chinese supply chains such as those in Southeast Asia, and major commodity producers including Chile and Argentina, a heightened Chinese demand could prove beneficial [para. 14]. The stimulus is a foundational step toward boosting Chinese economic growth, yet long-term success hinges on further structural reforms. Improvements in the overall business climate, especially for non-state and foreign-invested firms, along with greater entrepreneurial encouragement and consumer spending, are essential for sustainable growth [para. 15].

Shang-Jin Wei, a professor of finance and economics at Columbia University, asserts this view. Notably, this article has been edited for clarity, reflecting opinions sourced originally in the Fudan Financial Review [para. 16][para. 17][para. 18].