To stabilise, not stimulate: China’s measured fix for a stagnant market

(Edited and refined by Candice Chan, with the assistance of AI translation.)

During a State Council executive meeting on 28 September, amid the traditional “Golden September, Silver October” peak season for property sales, Chinese Premier Li Qiang called for greater efforts to roll out interest subsidies to boost investment and consumption. The next day, an unprecedented central government policy was announced: from 1 October, first-time homebuyers will be eligible for a 1% mortgage interest subsidy.

According to a notice jointly issued on 29 September by China’s Ministry of Finance, central bank and financial regulator, the scheme is targeted at ordinary households buying their first home. To qualify, buyers must be purchasing a home for the first time for their own use, with a floor area of no more than 120 square metres and a total price not exceeding 1.5 million RMB (US$223,700). The subsidy applies only to commercial mortgages, and those who meet the criteria can receive a 1% interest subsidy for up to five years on as much as 1 million RMB of their mortgage, putting the maximum value of the package at 50,000 RMB.

Yet this unprecedented first-home mortgage subsidy failed to give property stocks an immediate boost. Instead, it sent a chill through the market, as Chinese property stocks plunged across the board in early trading on 30 September, with many hitting their daily loss limits. The tide began to turn only in the afternoon when bargain hunters poured in, resulting in a roller-coaster trading session.

Analysts noted that rumours of a nationwide mortgage interest subsidy to be introduced before the holiday had already begun circulating in late September, sending the property sector up about 20%. Much of the expectation had therefore already been priced in. Once the official policy was announced, substantiating the rumour, speculative investors who had entered the market early took their profits and promptly shifted their money into technology stocks.

Measured wording

While the package is unprecedented, its scale remains relatively modest. Given current home prices in China, eligible properties in first-tier and strong second-tier cities such as Beijing, Shanghai, Nanjing and Hangzhou are either scarce or located in distant suburbs. By contrast, homes in the 1.5 million RMB price range are more readily available in weaker second-, third- and fourth-tier cities. The subsidy may encourage families already planning to buy a home to bring forward their purchases, while easing their monthly mortgage payments, but it is unlikely to fundamentally change market expectations, much less provide a significant boost to home prices.

The wording of the State Council executive meeting itself is telling: the authorities are looking to study and introduce policies to “stabilise” — rather than “stimulate” — the property market. The meeting also called for measures to promote effective investment, boost employment and incomes, and work towards meeting this year’s economic and social development targets.

China’s economy grew by 5.0% in the first quarter and 4.3% in the second, with second-quarter growth already falling below the full-year target range of 4.5% to 5%. Given the tendency for China’s quarterly growth to be stronger in the first half and weaker in the second, the challenge of lifting the economy sufficiently to meet the full-year target is considerable. Yet the authorities’ stimulus measures remain restrained and incremental, suggesting little sense of urgency.

Anxiety and debate

Economists and netizens, however, are more anxious, with the sentiment cropping up through debates and other channels, rather than surfacing directly on public platforms. One example was the heated exchange at the Tsinghua PBC School of Finance Chief Economists Forum on 19 September, sparking online debate that is still ongoing. Should China be more concerned about growth or economic imbalances? Should it prioritise investment or consumption? Economists calling for more investment and infrastructure spending immediately drew sharp pushback.

On the other side were Yao Yang, dean of the Dishui Lake Advanced Finance Institute at Shanghai University of Finance and Economics, and Li Xunlei, chief economist at Zhongtai Financial International, who called for higher household incomes, better income distribution and stronger consumption. They were categorised as the “pro-consumption camp”.

The two sides were evenly matched with compelling arguments. But for some ordinary Chinese struggling to make ends meet, with university-educated children worried about finding jobs after graduation and middle-aged workers fearing unemployment, the hope is that policymakers will pay more attention to these immediate, bread-and-butter concerns. They are therefore less receptive to arguments that China needs more investment, that short-term fiscal stimulus is ineffective, or that domestic consumption cannot absorb production capacity previously geared towards exports.

One self-deprecating comment by a netizen struck a chord with many people: “The experts’ PowerPoint presentations are in colour; my life is in grey.”

Balancing growth and spending

This shows that current weak consumer spending and the tightening of purse strings of middle-class households in China are really due to necessity rather than choice, as uncertainty about the future has pushed many into a defensive posture. People may still be getting by, but frustration is building. Before the Covid-19 pandemic, Chinese consumption had been growing steadily and was an important engine of economic growth. Today, some reports are warning that China’s consumer stocks could be heading into a “lost decade”.

To some extent, this may also reflect a deliberate policy direction: encouraging people to rein in discretionary consumption, discouraging excessive investment in property, and directing more of their energies towards work and careers, while concentrating national resources on advanced manufacturing and high-tech industries to bolster China’s hard power amid intensifying competition between major powers.

Over the past decade or two, unbalanced economic growth, a runaway property bubble, widening inequality and mounting local government debt may have left China’s top leadership deeply wary, prompting a determined drive to deleverage and deflate asset bubbles. But after several years of painful adjustment, the time may have come to recalibrate the policy focus and allow technological development and consumption growth to move in tandem.

Indeed, therein may lie a major source of China’s future potential and appeal. Technological development and a thriving consumer market need not come at each other’s expense. On the contrary, they can reinforce each other, giving China a strong hand in international competition while also helping to ease trade frictions with other countries and reduce social risks.

This article was first published in Lianhe Zaobao as “让科技发展与消费“两条腿走路””.

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