A drowning man will grab at anything for help, but it would be easier if someone threw him a life preserver. So it is with the economy. It will eventually recover from recessions, but there are ways to speed things up.
For example, if a recession comes and there are growth targets to meet, the government could increase investment in infrastructure development. The downside is that it requires significant funding.
Alternatively, the central bank could lower interest rates to make loans for business expansion more accessible. However, this effect won't be immediate due to time lags, which can take up to 18 months.
Cutting corporate and personal income taxes could also make a difference. For businesses, it would free up cash for growth investments, while individuals would have more money to spend.
The downside of this approach is that it could lead to lower government revenues and potentially larger deficits, so governments with a large imbalance often look for other options.
What has the Chinese regulator chosen?
New stimulus measures announced this week to boost the economy, which is struggling to reach its 5% growth target this year, will include reducing borrowing costs, increasing liquidity, and easing mortgage payments.
In addition, People's Bank of China Governor Pan Gongsheng announced plans to cut the reserve requirement ratio (RRR) by 0.5%, injecting 1 trillion yuan of long-term liquidity into the market.
The Chinese market reacted positively to the news, with the CSI 300 index rising 3.8% on Tuesday, outperforming the Dow Jones index, following the announcement of the measures.
This optimism will likely last for a while, but it is too early to say whether the long-term trend will change, as even a large stimulus package may not have a significant impact.
Specifically, it is only expected to boost growth by around 0.2% in 2024, with most of the effect being felt in 2025. So, we are not looking at significant numbers, even regarding potential impact.
The worsening geopolitical situation also presents risks for the Chinese market, especially with increasing trade tensions with Europe and, more significantly, with the United States and its allies.
This is especially critical given China's export-driven economic model.
In response to the question of what else is needed to make growth more sustainable, it goes beyond easing policies to support the real economy and includes fiscal measures.
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