In recent weeks, China’s economic policymaking has been inconsistent and slightly unpredictable. For example, draft rules on video games suddenly vanished from the regulator’s website a month after they were published. The regulations, which aimed to caution against “irrational consumption behavior” in video games, caused a significant drop in the shares of tech companies like Tencent.
Following this, China’s central bank governor, Pan Gongsheng, held a press conference and announced an unexpected cut in reserve requirements for banks. This was an attempt to stabilize the market after the bank had failed to cut interest rates earlier in the month.
The government’s concessions to market sentiment have not been very effective. Data on January 31st showed a slowdown in construction and ongoing declines in manufacturing prices. As a result, China’s stock markets continued to fall, erasing the gains made after Mr. Pan’s announcement.
China’s inconsistency in policy decisions has proven to be costly. For instance, the central government has ordered 12 provinces and cities to halt infrastructure projects, making it challenging for the government to provide the fiscal easing needed to restore confidence and spur growth.
China is currently facing a period of “de facto fiscal austerity,” as borrowing has failed to offset tighter local-government borrowing. This, combined with a property slump, has led to a slowdown in China’s nominal growth and a decline in the GDP deflator.
The stock market’s weakness reflects the economic challenges facing China. There is also uncertainty about how the government will respond. The fear of more regulations if the market rebounds makes a recovery less likely, and doubts persist about the government’s willingness to rescue the property market.
It is crucial for the government to provide fiscal stimulus and maintain a stable stock market to restore confidence among consumers, homebuyers, and entrepreneurs. However, the government’s slow response and reluctance to spend the allocated funds have failed to impress investors.
The confidence of consumers, homebuyers, and entrepreneurs is vital to China’s recovery, and it is crucial for the government to take decisive actions to stabilize the economy and instill confidence.
While China’s economic policy makers have stressed the importance of a stable stock market, their words alone have not been sufficient to impress investors, and there is a need for more concrete actions to address the economic challenges facing the country.
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