How will Beijing’s stimulus package impact Chinese consumer spending?

Stimulus. What many businesspeople, economists and policy makers have been crying out for finally came with a bang in late September; at a pace that surprised almost everyone. The desire for a more upbeat mood leading into the October holiday - anchored around the National Day celebrating the PRC’s 75th anniversary – was likely to have contributed to the timing of Beijing’s “bazooka” package to stoke the economy. 

The plans included help for the property industry and stock market, cash handouts for parents and the poor, and more government spending.

Part of the package freed up ¥1 trillion ($142b) for new lending, with lower interest rates and deposit requirements. Beijing has also dramatically increased the amount that can be borrowed by insurers, brokers and asset managers to buy shares. Alongside the extra capital, the policy demonstrated Beijing’s backing for investing in stocks, which is advantageous in a market driven by government policy. This saw China’s 300 blue chip stocks grow over 25% in a little over a week, with their best day in 16 years last Monday.  Sat Duhra, a fund manager at Janus Henderson, noted that “China is the only game in town.”

French billionaire Bernard Arnault, chairman and CEO of LVMH, saw his wealth inflate $17 billion in one day. His company’s stock price grew on the basis of Beijing’s package increasing the confidence of luxury goods-buying Chinese consumers.

Beyond the stock market, China’s package aims to stabilise real estate by reducing mortgage rates and down-payment ratios. State media reported that China’s home sales rose during the National Day holiday.

The all-important consumer sentiment

One of the largest drags on China’s GDP growth is Chinese consumer sentiment. Whilst some segments and geographies remain relatively upbeat, the overall sentiment has been historically low in China.

Will the latest stim measures boost consumer sentiment? Probably not to 2021 levels, but there are some things worth nothing. The property market has had a massive impact on how prosperous Chinese consumers are feeling, and a stabilised sector can only be positive. Servicing mortgages will be cheaper, freeing up money for other things. Trillions more yuan circulating around is likely to create more opportunities, and with it more optimism.

The most tangible impact so far is the pop in stock prices. The rise and fall of stock prices have had limited impact on Chinese consumer spending historically, although that may change. Chinese consumers have built most of their wealth from owning real estate which, until recently, has mostly appreciated unabated. Whilst the stim measures may stabilise real estate prices, most Chinese now understand that Beijing sees houses for living, not for speculation.

The unreliability of China’s stock market has kept many Chinese middle class from investing too much into shares. But with property no longer a sure bet, Chinese will be looking for alternative forms to drive their wealth creation and sentiment.

If Beijing can maintain longer term growth beyond the spike over the last couple of weeks, consumers may see stocks as a reliable way to grow their wealth. This will also inject more capital for China’s businesses to develop.

The 25% growth of the stocks will already have a segment of consumers feeling wealthier, and the general feelings around the stimulus measures are likely to help push sentiment up overall, having flow on effects for the real economy.

Beijing has always had more levers to pull than other governments to alter the direction of the economy, and it finally appears to be more eager about pulling them. We should see their impacts relatively soon.