Monday after Beijing rolled out more measures to support the market. Among other steps, the government halved the stamp duty on stock trading to “invigorate the capital market and boost investor confidence,” according to the Ministry of Finance and State Taxation Administration.
The move was the latest effort to bolster China’s stuttering economy. The country’s leaders have vowed to help boost investor confidence and support the housing and property industries, which support millions of jobs. But the economy has sputtered as a recovery in the post-pandemic era flags and a debt crisis in the property sector deepens.
This has sparked fears that Beijing is moving too slowly to revive economic growth. Investors want massive fiscal stimulus, with Beijing spending tens of billions on infrastructure projects and other initiatives to drive growth. But a raft of weak data in recent weeks suggests that Beijing is struggling to boost demand and may face deflation instead of inflation.
Deflation is less severe than inflation but still poses risks for the economy. It can lead to a sharp price fall, hurting producers and consumers. This could also make it harder for Beijing to meet its growth targets, as it would require more investment and credit to generate the same economic output.
One critical challenge for Beijing is ensuring that any new credit flows boost productive investments and do not fuel further speculation and asset bubbles. The slowdown in overall credit growth has meant that banks have retreated from lending to the private sector. This shift means that most of the new money flows to a small group of highly protected borrowers, including quasi-fiscal institutions at the local government level and private equity funds with more explicit Beijing guarantees. Private sector borrowing has slowed, and the risk of an asset bubble in the property market has diminished, but it is far from clear that this is sufficient to trigger the kind of consumer spending that would lift growth.
There is a lot more that Beijing can do to encourage spending and prevent the economy from cooling. It can ease borrowing conditions for homeowners, property developers, and local governments. It can give households tax breaks on interest and investment income. It can offer significant subsidies for energy companies and agriculture, as it did last year. But unless it finds a way to channel funding to vast areas of productive investment (even as global conditions deteriorate) or manages to engineer substantial wealth transfers that shift income from savers to spenders, the problem will persist.
