How Far Can China’s Giant Economic Stimulus Package Go?

On Sept. 24, the Chinese government revealed its second-largest stimulus package in history in a bid to jumpstart its economy scathed by an ongoing debt crisis and property sector collapse. But Stephen Roach, the former chairman of Morgan Stanley (MS) Asia, warned against becoming too optimistic about China’s giant stimulus package last week. “It’s going to take more than one package to transform the opportunity from bust back to boom,” Roach told Observer.

Chinese leaders indicated more funds are coming, signaling a commitment to revitalizing growth. This news led to significant market reaction, with Chinese equities seeing their largest single-day surge since 2008. Since the stimulus announcement, the CSI300 index, which tracks the top 300 stocks on the Shanghai and Shenzhen stock exchanges, is up more than 25 percent.

Roach cautioned Wall Street, where many quickly shifted from bearish to bullish on China after the stimulus package. The billionaire investor David Tepper, who runs the Miami-based hedge fund Appaloosa Management, told Bloomberg he was buying more of “everything” on the news of China’s stimulus package. Goldman Sachs reported its hedge fund clients buying the most Chinese stocks since 2016, when the firm started tracking the data.

Roach contends that Japan’s Lost Decades—a period of stagnation that began in the 1990s and persisted until the 2010s—offer a cautionary lesson for China, beyond short-term market rallies. After a 66 percent drop in Japan’s stock markets following the 1990s’ Nikkei bubble pop, Roach described the market experiencing four dead cat bounces averaging 34 percent each over the next decade. “Each one of those bounces was followed by an even larger decline,” he said. “I’m not saying [the recent rally in China] is a false alarm, but to the extent that Japan is a model that China needs to look at, that trajectory is worrisome.”

Despite the stimulus, deep structural issues persist in China’s economy, Roach warned. Once a long-time optimist about China, Roach became skeptical when its leaders failed to address concerns raised by former Premier Wen Jiabao, who in 2007 warned that China’s growth was “unstable, unbalanced, uncoordinated and unsustainable” beneath the surface.

China’s labor productivity crisis

China’s structural challenges include well-known issues like its aging population, but also a less-discussed crisis in labor productivity. Despite being the world’s second-largest economy, China ranks 99th by GDP output per worker, according the International Labor Organization. Contributing to this crisis is China promoting the role of state-owned enterprises, which are far less productive than their privately-sector counterparts, plays in the economy. By market capitalization, state-owned enterprises have made an increasingly larger share of China’s top 100 companies since 2020.

Roach argued that Beijing must acknowledge these issues and learn from Japan’s ‘Abenomics,’ which had a three-arrow approach to reviving Japan’s economy: monetary, fiscal and structural. Roach said that China’s stimulus package is a strong initial monetary response, but fails to address structural issues.

China improving its productivity depends on innovation, but new company formation is near zero in 2024 so far, a massive collapse from the 50,000 startups founded in 2018. “The entrepreneurial spirit is dead,” a Beijing executive told the Financial Times last month. Chinese-based venture capitalists are suing failed startups or companies that didn’t go public by a certain date.

“The bottom line is that the traction of startups and VC funding is lacking,” Roach explained. “It’s hard for China to address some issues because of their ideology.”

China has attempted to address some of these structural issues recently. Last month, Beijing announced a new rule to raise the retirement age for the first time since the 1950s—from 60 to 63 for men and 55 to 58 for women (50 to 55 for women in blue-collar jobs)— in an effort to hedge against a shrinking workforce. The change will take effect in phases starting in 2025 over a 15-year period. For comparison, it took the U.S. 33 years (starting in 1983) to increase the retirement age by two years (from 65 to 67).