There is a mounting sense of urgency in China’s policymaking circles as the country’s economic slowdown becomes increasingly difficult to ignore. After months of weak recovery and growing distress in key sectors, Beijing appears to be coming to grips with the gravity of the situation. In response, on September 24, the People’s Bank of China (PBOC) unveiled a sweeping set of measures, signaling that China’s central bankers are prepared to take more aggressive steps to tackle the ongoing challenges.
Yet, while these monetary moves are significant, many experts argue that liquidity injections alone won’t suffice. The true test lies in whether Beijing will complement these efforts with a comprehensive fiscal package that addresses both immediate economic pressures and deeper structural issues.
Economist Liu Shijin, a leading voice in China’s economic debate, has emerged as one of the most vocal advocates for bolder fiscal action. He has called for a massive 10 trillion yuan ($1.4 trillion) fiscal stimulus to jumpstart growth, emphasizing the need for both short-term relief and long-term structural reform. Liu’s proposals reflect a growing consensus that without a coordinated blend of monetary, fiscal, and structural policies, China’s recovery could be long, drawn-out, and fraught with challenges.
PBOC’s Surprising Moves
The PBOC’s latest actions surprised markets, introducing a series of aggressive policy measures aimed at boosting liquidity, stabilizing the property market, and supporting capital markets. The centerpiece was a 50-basis-point reduction in the reserve requirement ratio (RRR), expected to inject around 1 trillion yuan into the banking system. The central bank also cut its reverse repurchase rate by 20 basis points, signaling a broader easing strategy that likely includes further cuts to the Loan Prime Rate (LPR) in the near future.
In addition to these interest rate cuts, the PBOC introduced targeted measures to assist the struggling real estate sector. Mortgage rates for existing homeowners will be lowered by 50 basis points, while the down payment for second-home buyers has been reduced from 25 percent to 15 percent. These steps are designed to ease the financial burden on homebuyers and stabilize a property market that has been in freefall for much of the past year.
To further bolster confidence in China’s capital markets, the China Securities Regulatory Commission (CSRC) rolled out new tools to encourage long-term investment. These include mechanisms allowing securities firms and insurers to use bonds, ETFs, and stocks as collateral for liquidity, creating a more supportive environment for equity investments and helping stabilize market sentiment.
Liquidity Alone Won’t Be Enough
While the PBOC’s actions provide some relief, liquidity injections alone are unlikely to address the deeper problems driving China’s slowdown. Key issues – such as weak domestic demand, a collapsing real estate sector, and an over-reliance on debt-fueled investment – require more than short-term liquidity boosts. This is why a growing number of economists and advisers, including Liu Shijin, are calling for a bold fiscal response that goes beyond monetary easing to tackle both immediate and long-term structural challenges.
Liu, a former deputy director of the State Council’s Development Research Center, has been one of the strongest advocates for large-scale fiscal intervention. His proposed 10 trillion yuan stimulus package aims to provide immediate relief while laying the foundation for a more sustainable growth model. Without significant fiscal support, Liu argues, China’s economy risks stagnation, with problems in the real estate sector and local government finances likely to worsen.
The Growing Consensus on a Comprehensive Fiscal Package
Though economists differ on the specific size of the fiscal support required, Liu’s recommendations are gaining traction, particularly as the depth of the real estate sector’s problems becomes clearer. Property investment has fallen by over 10 percent in 2024, and the oversupply of housing has left developers burdened with unsold inventories. The slowdown in China’s urbanization, combined with demographic shifts – such as an aging population and declining birth rates – suggests that housing demand is unlikely to return to previous levels. This isn’t just a cyclical downturn; it’s a structural shift that demands a bold, coordinated response.
A favored approach among economists, which Liu dubs the “stimulus-plus-reform” framework, is built on the premise that fiscal intervention must be paired with structural reforms to steer China out of its current crisis. One key element of this proposal is boosting domestic consumption, stemming from the recognition that China’s over-reliance on investment and exports has made the economy vulnerable. Shifting to a consumption-driven model is critical for sustainable growth, and this would require significant government spending to support household incomes, reduce inequality, and build social safety nets, especially in healthcare and pensions.
Another crucial aspect of the fiscal plan is addressing the mounting issue of local government debt. Many local governments have long relied on land sales to finance infrastructure projects and social services, but with the real estate market in freefall, they are now struggling to generate revenue. Converting a significant portion of local government debt into central government debt, which would relieve some of the immediate financial pressures on local authorities, seems inevitable. This could be paired with broader fiscal reforms, such as increasing fiscal transfers from the central government or introducing new tax mechanisms that allow local governments to generate revenue without depending on land sales.
What Else Is Needed? Restoring Confidence, Rebuilding Trust, and Implementing Structural Reforms
While both monetary and fiscal policies are essential, they are far from a complete solution. One of China’s most pressing challenges is to restore confidence – among businesses, consumers, and investors. The economy has been battered by regulatory crackdowns, extended COVID lockdowns, and a prolonged slump in the property market. This erosion of trust has been compounded by what appears to be a lack of clear direction from policymakers. For any recovery plan to succeed, rebuilding this trust will be critical.
Furthermore, local governments need more than temporary debt relief. A comprehensive overhaul of China’s fiscal system is required to establish stable, reliable revenue streams. Without such reforms, the country faces the ongoing risk of repeated debt crises.
Complicating China’s recovery is the broader global environment. Trade tensions with the United States and weakening global demand have limited China’s ability to depend on exports as a growth driver. This heightens the need to shift the focus toward stimulating domestic consumption and driving innovation. To achieve this, China must prioritize the development of globally competitive industries, especially in high-tech manufacturing and renewable energy. This will demand sustained investment in research, development, and infrastructure, alongside policies that encourage private sector innovation.
What’s Next? The Path Forward for Beijing
As the PBOC’s monetary moves unfold and calls for a bold fiscal package grow louder, the question remains: Will Beijing rise to the occasion? Without a coordinated mix of monetary, fiscal, and structural reforms, China risks slipping into prolonged stagnation. In the coming months, in addition to liquidity boosts, all eyes will be on whether Beijing follows through with the bold fiscal measures that Liu Shijin and others are advocating.
A large-scale stimulus package, combined with targeted reforms to boost consumption, relieve local government debt, and support emerging industries, could be key to pulling China out of its current economic malaise. Ultimately, liquidity is important, fiscal support is critical, and long-term structural reforms are indispensable. Only by addressing all three can China hope to navigate its way out of this prolonged post-COVID slowdown and lay the groundwork for more sustainable growth.