Crafting an Ideal Restructure: The 'Goldilocks' Approach
China's latest fiscal and monetary initiatives focus on stabilizing capital wealth deflation, enhancing consumption among higher-income groups, and encouraging the transition of household savings into bonds. Additionally, these measures aim to promote structural growth in both high-tech and green industries.
TroibNews 
Editor's note: Warwick Powell is an adjunct professor at Queensland University of Technology and a senior fellow at Taihe Institute, Beijing. The article reflects the author's opinions and not necessarily the views of CN.
On September 26, China's Politburo introduced a series of fiscal and monetary policies in response to mixed economic data from August 2024. Public reactions have varied, with some praising the measures as a "bazooka," while others deem them inadequate, calling for more robust fiscal expansion.
To understand these measures, it is essential to evaluate the current state of China's economy. A progressive shift is occurring in the social composition of capital across three dimensions:
1. **Sectoral:** The residential property development sector experienced a soft decline starting in 2017, with a more noticeable correction happening in 2019-2020. This deflation in the property market aimed to reduce excessive leverage and lower the price-to-income ratio for homes. The national property price index has reverted to levels seen in 2015-2016. In contrast, credit expansion has predominantly occurred within high-tech manufacturing and green energy sectors, as well as among micro and small enterprises. The focus has shifted toward real economy capital formation rather than the financial trading of publicly listed stocks.
2. **Geographic:** There has been a shift in sectoral activities from tier-1 cities to tier-2 cities. Credit growth in residential development and household income increases have primarily concentrated in tier-2 cities. The process of deleveraging has particularly affected consumption patterns among higher-income households in tier-1 and tier-2 cities, who contribute significantly to overall household spending.
3. **Demographic:** Income growth is shifting towards households in the lower three quintiles, notably outside of tier-1 and tier-2 cities. Many residents in tier-1 and tier-2 locations are rural migrants living on the outskirts and renting properties.
Data on urban-rural income changes supports this trend, revealing that rural incomes are increasing at a faster pace than urban ones. This aligns with a gradual decline in the GINI coefficient since 2012. Interestingly, the labor market has remained resilient, with unemployment hovering around 5.2-5.3 percent despite significant structural changes. The impact of declining property and stock values primarily affects households in tier-1 and tier-2 cities, particularly those in the top income and capital wealth brackets.
The recent adjustments to interest rates on residential loans, along with funding for stock market stabilization, directly target this demographic, anticipating that higher-income households will boost their consumption as financing costs decrease and wealth effects take hold. Loosening housing purchase regulations is intended to facilitate a smooth transition from the property market deflation seen over the past five years. Additionally, the central government is funding new public housing models to support this.
Despite this, disposable income and consumption data indicate moderate levels of overall growth. In essence, high-income individuals are spending less than before, which affects aggregate statistics, while lower-income groups are seeing an increase in both earnings and spending choices. The key concern is the extent to which this additional income is being utilized. As household incomes rise, the savings rate in cash deposits has also surged over the past few years.
The expanded issuance of medium to long-term bonds and the reduction of barriers for wealth management product creation aim to encourage households to invest their savings from cash holdings into interest-bearing securities. This strategy is expected to mitigate asset price volatility by drawing retail cash out of circulation.
These shifts have occurred alongside a decline in the annual rate of credit growth, particularly notable in the residential property sector. Credit growth peaked at over 20 percent in 2017 and fell to under three percent in 2020-21, currently resting at around five percent. Easing reserve requirements for commercial banks targets credit growth challenges, although commercial lending is not strictly limited by these ratios. It is important to note that while credit growth remains lower than pre-COVID levels, there is robust credit growth in the non-property private sector.
The challenge lies in balancing an aggregate GDP target with the changing sectoral, spatial, and demographic dynamics, where low to medium-income brackets are benefiting, while the affluent face capital wealth reductions. Notably, Bloomberg forecasts that by 2026, the impact of high-tech industries on GDP will surpass that of property development, highlighting the structural changes underway.
The recently announced measures aim to stabilize the decline in capital wealth, boost consumption among higher-income households, and enhance broader consumption growth in lower-income segments. Simultaneously, they seek to redirect unused household cash into medium- and long-term bonds, potentially curtailing asset price volatility by easing retail investor participation.
As these transformations permeate the economy, the question remains: how quickly will these changes unfold? The central policy authorities appear relatively satisfied with the current equilibrium, opting against drastic liquidity injections or cash infusions, favoring more indirect methods to increase consumption demand while stabilizing asset value depreciation. Still, direct capital injections could become necessary, particularly to assist lower-income households in further stimulating consumption.
These conditions outline the parameters of the balanced structural change that policymakers are aiming to achieve.
Sophie Wagner contributed to this report for TROIB News
On September 26, China's Politburo introduced a series of fiscal and monetary policies in response to mixed economic data from August 2024. Public reactions have varied, with some praising the measures as a "bazooka," while others deem them inadequate, calling for more robust fiscal expansion.
To understand these measures, it is essential to evaluate the current state of China's economy. A progressive shift is occurring in the social composition of capital across three dimensions:
1. **Sectoral:** The residential property development sector experienced a soft decline starting in 2017, with a more noticeable correction happening in 2019-2020. This deflation in the property market aimed to reduce excessive leverage and lower the price-to-income ratio for homes. The national property price index has reverted to levels seen in 2015-2016. In contrast, credit expansion has predominantly occurred within high-tech manufacturing and green energy sectors, as well as among micro and small enterprises. The focus has shifted toward real economy capital formation rather than the financial trading of publicly listed stocks.
2. **Geographic:** There has been a shift in sectoral activities from tier-1 cities to tier-2 cities. Credit growth in residential development and household income increases have primarily concentrated in tier-2 cities. The process of deleveraging has particularly affected consumption patterns among higher-income households in tier-1 and tier-2 cities, who contribute significantly to overall household spending.
3. **Demographic:** Income growth is shifting towards households in the lower three quintiles, notably outside of tier-1 and tier-2 cities. Many residents in tier-1 and tier-2 locations are rural migrants living on the outskirts and renting properties.
Data on urban-rural income changes supports this trend, revealing that rural incomes are increasing at a faster pace than urban ones. This aligns with a gradual decline in the GINI coefficient since 2012. Interestingly, the labor market has remained resilient, with unemployment hovering around 5.2-5.3 percent despite significant structural changes. The impact of declining property and stock values primarily affects households in tier-1 and tier-2 cities, particularly those in the top income and capital wealth brackets.
The recent adjustments to interest rates on residential loans, along with funding for stock market stabilization, directly target this demographic, anticipating that higher-income households will boost their consumption as financing costs decrease and wealth effects take hold. Loosening housing purchase regulations is intended to facilitate a smooth transition from the property market deflation seen over the past five years. Additionally, the central government is funding new public housing models to support this.
Despite this, disposable income and consumption data indicate moderate levels of overall growth. In essence, high-income individuals are spending less than before, which affects aggregate statistics, while lower-income groups are seeing an increase in both earnings and spending choices. The key concern is the extent to which this additional income is being utilized. As household incomes rise, the savings rate in cash deposits has also surged over the past few years.
The expanded issuance of medium to long-term bonds and the reduction of barriers for wealth management product creation aim to encourage households to invest their savings from cash holdings into interest-bearing securities. This strategy is expected to mitigate asset price volatility by drawing retail cash out of circulation.
These shifts have occurred alongside a decline in the annual rate of credit growth, particularly notable in the residential property sector. Credit growth peaked at over 20 percent in 2017 and fell to under three percent in 2020-21, currently resting at around five percent. Easing reserve requirements for commercial banks targets credit growth challenges, although commercial lending is not strictly limited by these ratios. It is important to note that while credit growth remains lower than pre-COVID levels, there is robust credit growth in the non-property private sector.
The challenge lies in balancing an aggregate GDP target with the changing sectoral, spatial, and demographic dynamics, where low to medium-income brackets are benefiting, while the affluent face capital wealth reductions. Notably, Bloomberg forecasts that by 2026, the impact of high-tech industries on GDP will surpass that of property development, highlighting the structural changes underway.
The recently announced measures aim to stabilize the decline in capital wealth, boost consumption among higher-income households, and enhance broader consumption growth in lower-income segments. Simultaneously, they seek to redirect unused household cash into medium- and long-term bonds, potentially curtailing asset price volatility by easing retail investor participation.
As these transformations permeate the economy, the question remains: how quickly will these changes unfold? The central policy authorities appear relatively satisfied with the current equilibrium, opting against drastic liquidity injections or cash infusions, favoring more indirect methods to increase consumption demand while stabilizing asset value depreciation. Still, direct capital injections could become necessary, particularly to assist lower-income households in further stimulating consumption.
These conditions outline the parameters of the balanced structural change that policymakers are aiming to achieve.
Sophie Wagner contributed to this report for TROIB News
