Despite the stock market’s hopes, China’s stimulus program will not stimulate the economy

Sure, Wall Street. Continue. Ride the dragon.

There was a moment of grace for investors, market analysts and financial chiefs on Tuesday as Beijing announced measures to revive China’s creaking economy. Pan Gongsheng, governor of the People’s Bank of China, the country’s central bank, announced that 800 billion yuan, or about $114 billion, would be pumped into the stock market. Policymakers also said they are discussing setting up a fund to stabilize stocks and announced rules that would allow Chinese banks to hold less money in reserves, freeing up 1 trillion yuan for lending. They also lowered the People’s Bank of China’s medium-term lending rate and key interest rates for banks and customers. Home buyers can also now spend less money on their purchases – an attempt to breathe life into China’s ailing property market.

Wall Street’s immediate reaction was one of utter jubilation. Since the pandemic, China’s leader Xi Jinping has done little to stop the bleeding in the country’s real estate market or to get China’s ailing consumers to start spending again. The Shanghai Composite lost almost a quarter of its value. American companies in China are being broken up. Foreign investors are withdrawing record amounts from the country. This week’s announcements sent Wall Street into raptures, hoping that now, as in years past, the Chinese Communist Party is prepared to catch a falling knife. The Golden Dragon Index – a collection of Nasdaq-traded companies that do most of their business in China – rose 9% after the announcements. Financial news speakers heralded this as a clear sign from Beijing that policymakers were serious about stopping China’s slide into a deflationary crisis. There would be more mergers and acquisitions! Lower interest rates could mean more private equity activity! The famous Beijing “bazooka” could finally be on the way!

But darling, they’re delusional.

Xi’s Beijing lacks the will and strength to transform China’s economy. At the heart of the problems are a lack of consumer demand and a real estate market that is in a deep, slow correction. Xi is ideologically opposed to boosting consumer spending through direct stimulus packages. No will. On the electricity front, Goldman Sachs estimated that restoring China’s housing stock to 2018 levels would require 7.7 trillion yuan. China’s real estate market is so overbuilt and indebted that the trillions in stimulus packages needed to solve the problem – and fix the local governments that financed it – would cost even a ruthless fundraiser like the CEO of OpenAI, Sam Altman, would make you blush. The “stimulus” that China’s policymakers are offering is a drop in the well, and they know it. Wall Street should do it too. But I think they haven’t learned.

The measures announced by the CCP are intended to make it easier for Chinese people to access capital and purchase real estate, but access to debt is not the problem here. People in the country do not want to spend money because they are already sitting on large real estate debts associated with property deterioration. Seventy percent of China’s household wealth is invested in real estate, which poses a problem as analysts at Société Genéralé have found that property prices in Tier 1 cities have fallen by up to 30% since their peak in 2021. Land purchases helped fund local governments so they could spend money on schools, hospitals and other social services now that the funding mechanism is out of whack. Falling prices in these sectors, or what economists call deflation, have spread to the broader economy. The latest report on consumer price inflation showed that prices rose just 0.3% in August from a year earlier, marking the lowest price increase in three years, sparking fears that deflation will take hold and spread to wages and will destroy jobs.

It is clear that Beijing’s recent moves will not solve China’s core economic problems.

Against this background, many Chinese are not willing to spend. Consumers are turning to cheaper products and retail sales rose just 2.7% year over year in the second quarter. In a recent note to clients, economic research institute China Beige Book said corporate borrowing has remained little changed since the all-time low in 2021, during the crisis. Conclusion: It doesn’t matter how cheap and easy access to loans is if no one wants to take one.

“These largely supply-side measures would certainly be helpful if the problem in China was that output was struggling to keep up with demand growth,” Michael Pettis, a finance professor at Peking University and a Carnegie Endowment fellow, said in a recent report Press release post on

The most direct way to stimulate demand in a deflationary economy is to send checks to households. But Xi doesn’t want that either. The Chinese president is a follower of Austrian economist Friedrich Hayek, who believed that direct stimulus distorts markets and leads to uncontrollable inflation. This is contrary to what economists would recommend for China’s situation, but those who criticize the way Xi does things tend to disappear.

It is clear that Beijing’s recent moves will not solve China’s core economic problems. And the excitement on Wall Street ignores another key problem: the measures aren’t all that big. Call it a bazooka or a blitz or whatever, but this stimulus is minuscule compared to what we’ve seen from the CCP in the past. In 2009, during the global financial crisis, the government cut 7.6 trillion yuan to save the economy. In 2012, $157 billion was saved on infrastructure projects. In 2015, the country pumped more than $100 billion into struggling regional banks and devalued its currency to boost flagging exports. The CCP has shown that it is willing to take dramatic measures to stabilize the economy. However, the price of this approach is enormous debt across the financial system, particularly among real estate companies, state-owned enterprises and local governments. In the past, monetary easing has calmed turmoil in the financial system, but growth has never been so slow and debt levels have never been so high. The problem here doesn’t match the price.

The Chinese Communist Party has a bubble on its hands, and it doesn’t want it to burst more or burst in a spectacular way. Then there’s Xi, who seems pretty uninterested in restructuring the real estate market. He wants government investment to focus on developing cutting-edge technologies and boosting exports to lift the economy out of its structural debt problems. But these new revenue streams have yet to materialize for China, and establishing them will require time and navigating trade disputes, particularly with the United States and the European Union. Think of the easing measures we’re seeing as a kind of moment for markets to catch their breath – a respite from the constant stream of bad economic news. But a reprieve is all it is.

Linette Lopez is a senior correspondent at Business Insider.