Commentary: China’s Stimulus Should Put People First

China's latest stock market rally has been attributed to a noticeable shift in economic policy, as indicated during a joint press conference on September 24 by the central bank, the top financial authority, and the top securities regulator. This shift suggests that the government is fully acknowledging the challenges of insufficient aggregate demand and the risk of deflation that the economy is facing, with a readiness to implement measures to address these issues [para. 1][para. 2]. However, merely changing the policy direction isn't sufficient; the success of the stock market recovery highly depends on the implementation of these measures [para. 3].

Historically, different periods of reform and economic stimuli have significantly influenced both China's economy and stock market. Between 1999 and 2002, significant transformations like state-owned enterprises (SOEs) reform, housing reform, and China's accession to the World Trade Organization (WTO) played crucial roles, resulting in a surge in the Hong Kong stock market in 2003, although the mainland market was less affected due to the problem of nontradable shares. Meanwhile, the 2004-2005 reform aimed at eliminating nontradable shares set the stage for the bull run in the mainland market from 2005 to 2006. The 4 trillion yuan ($563 billion) economic stimulus during the global financial crisis in 2009 and 2010 stabilized China's economy but also led to issues like local government debt crises. A rally in late 2014, stimulated by SOE reforms, faced obstacles when the bubble burst in mid-2015 due to the limited economic benefits the reform generated [para. 4][para. 5][para. 6].

Learning from these experiences reveals that successful improvements in China's economy and stock market came from bold steps like WTO accession, housing reform, and reforms concerning nontradable shares. While WTO accession was pivotal for global integration, in today's deglobalization era, a similar move seems challenging [para. 7].

Housing reform allowed the government to transfer benefits to the public by enabling urban workers to buy dormitories at lower prices, shifting government wealth to urban residents. This step, despite causing short-term government losses, propelled the real estate market and contributed to a property boom. Similarly, the nontradable shares reform required large shareholders, mostly SOEs, to compensate minor shareholders for transferring nontradable shares into tradable ones. Again, despite short-term losses for SOEs and local governments, this set the stage for future refinancing by major shareholders and the robust development of the stock market [para. 8][para. 9].

For the latest economic stimulus policies to positively impact the economy and stock market in the long run, focusing on benefiting the public, like in past housing and nontradable share reforms, could be crucial. The relatively low consumption share of GDP in China—38% from 2013 to 2022 compared to over 50% in major global economies—partly stems from a high savings rate and a low household income share in overall income distribution [para. 10].

In the short term, significantly increasing household income through primary distribution is unrealistic. Instead, enhancing income redistribution could raise disposable income, boosting consumption. Policies should aim to shift fiscal spending control from government to households, putting money directly into the hands of the public. Ensuring these subsidies encourage spending rather than saving is fundamental. Strategies include issuing consumption vouchers requiring timely use or making subsidies permanent to manage household income expectations [para. 11][para. 12].

If this economic stimulus policy effectively shifts household income expectations and consumption habits, it will enhance economic growth, alleviate deflationary pressure, and increase corporate profits, offering a strong foundation for a sustainable stock market rise [para. 13].