In a significant move to counter its economic slowdown, China is considering a proposal to issue 2 trillion yuan (about US$280 billion) in special bonds. This plan, put forward by a leading government-affiliated think tank, aims to create a stock market stabilization fund. The goal is to restore investor confidence and support the nation’s struggling economy by shoring up its volatile capital markets, which are a key indicator of public sentiment.
Why China is Pushing for a Stabilization Fund
The proposal comes from the Institute of Finance and Banking, a part of the Chinese Academy of Social Sciences. It highlights the government’s increasing focus on the stock market as a tool for economic recovery. The fund is designed to act as a buffer during periods of high market volatility.
The primary objectives of this massive fund would be to:
- Enhance the overall stability of China’s capital markets.
- Purchase blue-chip stocks and exchange-traded funds (ETFs) to support prices.
- Attract new investments from household savings and foreign capital.
This move is seen as a way to quickly boost market confidence, especially when consumer sentiment is low. With over 200 million retail investors, China’s stock market performance has a direct impact on public mood and spending habits. Policymakers hope a stable market will encourage households to invest their savings, providing a much-needed stimulus.
A Response to a Struggling Economy
The timing of this proposal is not a coincidence. China’s economy has been facing significant headwinds, with GDP growth in the third quarter of 2024 slowing to 4.6%, the lowest in over a year. The country is grappling with a combination of weak consumer demand, a persistent crisis in the property market, and unfavorable global economic conditions.
The government has already implemented several stimulus measures to revive growth, but their impact has been limited. The economy is still struggling to meet the annual growth target of around 5%, prompting authorities to consider more direct and powerful interventions.
Previous Stimulus Measures and Their Impact
In recent months, Beijing has rolled out a series of policies to support the economy. The People’s Bank of China (PBOC), the country’s central bank, has been particularly active. It recently launched a 50 billion yuan (US$7.03 billion) swap facility to inject liquidity into the stock market, allowing financial institutions to get cash for stock purchases more easily.
However, these and other measures have not yet produced a strong recovery. Many of the government’s efforts have fallen short of expectations, leading to calls for more decisive action like the proposed stabilization fund.
| Measure | Objective | Impact |
|---|---|---|
| Interest Rate Cuts | Lower borrowing costs for consumers | Encouraged borrowing, but consumer demand remains weak |
| Eased Property Restrictions | Stimulate real estate market | Limited recovery in property values so far |
| 50 Billion Yuan Swap Facility | Provide liquidity to the stock market | Helped stabilize stock market sentiment |
| Proposals for 2 Trillion Yuan Bond Issuance | Fund stock market stabilization fund | Expected to boost confidence in equity markets |
Expert Skepticism and Lingering Challenges
Despite the bold proposal, many economists and analysts remain cautious. They argue that while injecting liquidity into the stock market can provide a short-term boost, it doesn’t address the fundamental weaknesses plaguing China’s economy, such as weak consumer spending and the ongoing property crisis.
Gary Ng, a senior economist at Natixis, noted that the swift policy moves suggest that “growth pressure has reached a tipping point.” He also pointed out that the wealth effect, where rising asset values lead to more consumer spending, has been significantly weakened by falling property and stock prices in recent years.
There are also concerns that relying heavily on stimulus could lead to other problems down the line, including a substantial increase in government debt. Critics suggest that broader economic reforms are needed for sustainable, long-term growth rather than just financial stabilization measures.
