The Communist Party of China Administers Strong Medicine to Stimulate the Economy, Legitimacy and Effectiveness Questioned.

Recently, the People’s Bank of China launched a series of stimulus policies, triggering a continuous surge in the Chinese stock market. This is the largest stimulus policy by the Chinese Communist Party in recent years, but its legitimacy and effectiveness have been questioned by outsiders.

Three months ago, Chinese Premier Li Keqiang spoke at the Davos Forum on June 25, addressing the deteriorating Chinese economy. He explained using traditional Chinese medicine concepts, stating that the Chinese economy needs to “strengthen its roots and nurture its essence” and “should not use drastic measures.” However, at that time, the official Chinese state media censored the latter part of his statement about not using drastic measures, only reporting the first half.

On September 24, the People’s Bank of China suddenly announced a series of economic stimulus policies, including reserve requirement ratio cuts and interest rate reductions, seen as a “drastic measure.” Two days later, on September 26, Xi Jinping chaired a meeting of the Central Political Bureau to analyze and discuss the current economic situation, solidifying a comprehensive set of policies to stimulate the economy.

Meetings of the Chinese Communist Party’s Politburo on economic issues usually take place in April, July, and December. However, after the July meeting, Xi Jinping broke the norm by holding another meeting in September to focus on the economy and make a significant decision, raising questions about the reasons behind this unusual move.

Reports suggest that the briefing on the comprehensive economic stimulus measures by the People’s Bank of China was hastily arranged 48 hours in advance. Insiders revealed that as the target for economic growth this year became increasingly unattainable, senior Chinese Communist Party policymakers held several unplanned closed-door meetings to discuss economic issues.

Mike Sun, a North American investment advisor, explained that these measures were not rushed and had been planned before September. He analyzed, “In early September, Morgan Stanley economists revealed that senior Chinese officials had begun to realize that deflation is more fearful than inflation. Ever since then, relevant departments should have prepared all the related plans and were just waiting for Xi’s approval. Now that they finally have it, the central bank and other departments rushed to implement these policies because the economy had reached a point where drastic measures were necessary, while also fearing a change of mind from Xi.”

On September 9, the team led by Robin Xing, chief economist of Morgan Stanley, published a lengthy report discussing their week-long visit to Beijing, where they met with policymakers and advisers to address entrenched deflation issues in China and the continued downturn in the real estate sector.

The report mentioned that the Chinese authorities might intervene in the real estate market through various means, but implementing relevant policies would take time.

Mike analyzed that Xi Jinping’s economic growth policies are facing a critical point where a change in direction is urgently needed, with the Fed’s interest rate cut in September serving as a catalyst for the introduction of a comprehensive stimulus package.

Xi Jinping is trying to gradually replace the growth model heavily reliant on real estate with the “new three items.” However, industries like new energy vehicles, lithium batteries, and solar panels are facing severe overcapacity and intense domestic competition, which may lead to economic challenges. Amid changing domestic and international economic environments, economic policies need significant adjustments.

David Huang, an economist based in the United States, analyzed that Beijing’s fundamental reason for launching major economic rescue measures is the inability to accept the speed of economic deterioration. He stated, “The current economic downturn poses a threat to the political stability of the Chinese Communist Party, especially jeopardizing Beijing’s attempt to dominate the discourse in Asia and change the world’s rules. Beijing can no longer sit idly by.”

Huang explained that many analyses suggest Xi Jinping’s motivation to change is due to concerns that achieving a 5% GDP growth rate is becoming unattainable. While the Chinese government has historically manipulated negative economic data to deceive the public, significant economic deterioration threatens political stability, prompting substantive responses.

The Chinese Communist Party’s comprehensive economic stimulus policies mainly focus on rescuing local government finances, the real estate market, and the stock market.

Regarding the financial difficulties affecting the normal operation of local governments, the Politburo meeting on September 26 emphasized the need to ensure essential fiscal expenditures and maintain the “three guarantees” for grassroots governments, namely “protecting salaries, ensuring operations, and safeguarding basic livelihoods.” It also mentioned issuing and utilizing special long-term national debt and local government special bonds.

To address the real estate crisis, the People’s Bank of China announced a reduction in mortgage interest rates for existing homes and standardized the minimum down payment percentage for mortgages.

Qiu Junrong, a professor of economics at National Central University in Taiwan, expressed to the media, “Rescuing China’s real estate market is already very difficult. I believe Xi Jinping is not genuinely trying to save the property market, but rapid deterioration could disrupt the entire Chinese banking and financial system, and the measures introduced are just delaying the worsening of the real estate situation.”

Regarding the stock market rescue, the Governor of the People’s Bank of China, Pan Gongsheng, declared the establishment of new monetary policy tools to support the stable development of the stock market. This stimulus policy quickly became the driving force behind the consecutive sharp rises in the Chinese stock market and a central point of attention.

Pan Gongsheng announced the introduction of two monetary policy tools to support the capital market, with an initial scale of 800 billion yuan (approximately 114.1 billion US dollars). One tool aims to guide commercial banks to provide loans to listed companies and major shareholders for buybacks and stock holdings. The first phase amounts to 300 billion yuan (about 42.8 billion US dollars), with the potential for additional tranches if successful.

The second tool involves the China Securities Regulatory Commission and the China Banking and Insurance Regulatory Commission supporting qualified securities, funds, and insurance companies to use their held bonds, stock ETFs, and components of the Shanghai and Shenzhen 300 indexes as collateral, exchanging them for high-liquidity assets such as national bonds and central bank bills from the People’s Bank of China sold in the bond market to raise funds.

Pan Gongsheng described this as a “pioneering structural monetary policy tool to support the capital market.” He also mentioned the first phase of 500 billion yuan (about 71.2 billion US dollars), with provisions for subsequent phases.

However, Pan Gongsheng’s self-proclaimed innovative structural monetary policy tool is suspected of violating the 30th article of the Law of the People’s Bank of China, which prohibits the People’s Bank of China from providing loans to local governments, government departments at all levels, non-bank financial institutions, and other units and individuals.

Commentator Jason remarked in his “Jason’s Perspective” channel that “the central bank directly injecting money into the stock market and participating in stock speculation is a historically crazy policy. He further criticized the guidance for commercial banks to provide loans to listed companies and major shareholders, encouraging them to repurchase and increase their company’s stocks. In a poorly supervised Chinese stock market, this action is equivalent to handing a scythe to company bosses to exploit common people’s money conveniently.”

Jason questioned the direction of this round of stimulus policies, suggesting that the authorities’ monetary policies have been attempted for a considerable amount of time across various sectors but have lacked lasting effects. He argued the core issue in the current Chinese economy is not a lack of money but a reluctance to spend and invest, predicting the fate of these stimulus policies to be short-lived.

Qiu Junrong indicated that “the primary problem in China’s current economy is deflation, youth unemployment, severe consumer power shortages, and the authorities are attempting to address real economic issues with financial means, which is futile.” He believed there is a lack of fiscal support for the real economy and a lack of major initiatives to stimulate consumption, indicating that these excessive financial measures could lead to currency devaluation and potentially turn the Chinese economy into a “Zimbabwe-like” scenario.