China’s 3-arrows of policy stimulus
- The policy shift since late September is significant…
- …forming a coordinated “three-arrow” approach: monetary, fiscal and structural rebalancing
- Policy announced thus far has limited growth impact
- Fiscal measures will follow soon; the magnitude, composition and forward guidance will all matter
- Whether it marks a permanent regime shift in China’s policymaking, however, remains to be seen
China launched a new round of policy easing in late September, and the comprehensive package beat market expectations. The positive surprise raised market expectations for further stimulus measures. Some investors compare the current policy shift with China’s 4-trillion stimulus packages in 2008-09, the ECB’s “whatever it takes” moment in 2012, and Japan’s three-arrow approach.
We agree that this policy shift is significant. In contrast to the incremental, piecemeal policy easing of the last few years, the latest policy announcements cover a comprehensive and coordinated package including three aspects: monetary easing, fiscal support and structural rebalancing to stabilize the weak links in the economy (housing, consumption and deflation) and innovative measures to support the equity market. However, the larger-than-expected monetary easing has raised hope for a massive fiscal stimulus. In our view, this is unlikely to materialize in the near term. Here we lay out our expectations for the path of fiscal measures, and discuss the impact on the macro outlook.
What has happened?
In the three-arrow approach (monetary, fiscal and structural rebalancing), monetary easing came first and beat expectations. On September 24, the PBOC announced larger-than-expected rate cuts and RRR cuts, five measures to stabilize the housing market and new facilities to support the equity market. In particular, the PBOC introduced a 500bn yuan swap facility and a 300bn yuan relending facility to encourage share buybacks, and provided forward guidance that the scale of these facilities can be topped up. This is the first time that the central bank has taken direct measures to support the equity market. The September Politburo meeting also encouraged pension funds, insurance and wealth management funds to increase exposure in the equity market. These measures sent strong signals and ignited enthusiasm in the equity market, leading to the strongest equity market rally in the past decade. Meanwhile, the PBOC deviated from the piecemeal monetary easing as adopted in recent years, cutting the 7-day reverse repo rate by 20bps, 1-year MLF interest rate by 30bps (vs. 10bps) and cutting the RRR by 50bps (vs. 25bps). The PBOC also guided toward further RRR cuts and monetary easing down the road.
In addition, the PBOC announced a new round of housing stabilization measures, including a ~50bp rate reduction for existing mortgages, lowering the national minimum down payment ratio for second home mortgages from 25% to 15% (same as first home mortgages), increasing PBOC’s funding support for the housing destocking relending from 60% to 100%, etc. In late September, tier-1 cities further relaxed home purchase restrictions. Counting cumulative housing easing measures since 2022, the housing policy stance has reached the most relaxed level on record.
By contrast, the NDRC press conference on October 8 failed to deliver additional policy surprises. As the leading government agency in charge of structural reforms and development strategy, the NDRC only reiterated the policy guidance as laid out in the Politburo meeting, but did not provide concrete details or new measures to promote structural rebalancing. For instance, the NDRC reiterated the need to support consumption and boost domestic demand with tools such as trade-in subsidies, fiscal transfer to the disadvantageous groups and developing elderly care and childcare services – but there are no concrete details. Although the policy tone has shifted, structural rebalancing remains a challenging task and it is difficult to design policies that work quickly
Fiscal stimulus expectation on the rise
Fiscal measures are still absent so far, but most (ourselves included) are expecting a change soon. The Ministry of Finance is in charge of fiscal policy, so it will be worth watching the press conference hosted by the Finance Minister this Saturday (October 12) and the NPC Standing Committee meeting likely in late October. The NPC approval is required if the fiscal package involves lifting the fiscal deficit or government debt ceiling. For instance, 1 trillion yuan of additional fiscal deficit was announced one year ago after the NPC Standing Committee meeting on October 24, 2023. What to expect for fiscal measures? Three aspects are important here: the magnitude, the composition and forward guidance on fiscal policy.
The last couple of weeks have seen the market build higher and higher expectations on fiscal stimulus. Reuters reported on September 26, a potential 2-trillion yuan fiscal package, including 1-trillion support for local governments and 1-trillion support for consumption (including cash allowance of 800 yuan per month for second-child families). This is now perceived as a minimum benchmark. Since then, larger numbers have kept popping up, from 3-5 trillion yuan, to 5-7 trillion yuan, or even 10 trillion yuan.
Based on the mood-music from policymakers, and their perceptions of the constraints on stimulus they face, we regard expectations for a headline 2 trillion yuan fiscal package as reasonable (excluding the new capital injection for major banks, at 1 trillion yuan as reported by Bloomberg). The Politburo meeting on September 26 called for strengthened countercyclical fiscal and monetary policy measures; on the fiscal side, the focus is “to ensure necessary fiscal spending”, “to issue and better utilize ultra-long special treasury bond and special local government bond”. But in our view there is no clear hint of a massive fiscal stimulus package. Meanwhile, 2 trillion yuan is reasonable in that one year ago, the government also announced a similar 2 trillion fiscal package, of which 1 trillion yuan additional special Treasury bond was used for disaster relief and 1 trillion yuan special local government refinancing bond was used for local government hidden debt swap program. The composition of fiscal support also matters. If the Reuters news is verified, 1 out of the 2 trillion yuan additional fiscal support will be used to support consumption. This, in our view, would be an encouraging policy re-direction (and it is one we have been advocating). Nonetheless, we are concerned that the actual outcome may disappoint, in that the fiscal support for local governments (to mitigate fiscal difficulties or to support local government hidden debt resolution) and investment may crowd out fiscal support for consumption.
In addition, the forward guidance is important, i.e. whether the government is prepared for additional fiscal easing to
achieve a sustainable recovery going forward. One policy lesson in recent years is that fiscal support has often been taken away too quickly, contributing to volatile economic activity (e.g. loss of momentum in 2Q23 and 2Q24). Accommodative fiscal policy is not only important in the very near term, but also into 2025 as the economy may face adverse shocks (e.g. continued weakness in the housing market, a slowdown in exports and the risk of heightened tariff tensions depending on the outcome of the US election in November). A larger than 2 trillion fiscal package is not our base case in October, but our expectation is that officials will not rule out potential for additional fiscal easing down the road.
Assessing the economic impact
We are awaiting details of fiscal measures to gauge the macro impact. In our view, monetary easing measures announced in late September help to remove downside risk to our 4Q growth forecast (5.5%q/q saar vs. 3% in 3Q). But additional fiscal measures are needed to convince us to upgrade growth forecasts. Indeed, our forecast has long anticipated some fiscal response to downside growth risks. We have laid out a three-stage fiscal response for this year (Table 1), which is important for the analysis on economic impact, as different types of fiscal measures tend to have different impact on our economic forecasts.

In stage 1 (July to September), the government moved forward to fully utilize this year’s quota of government bonds. This is reflected in the rapid catchup of special local government bond issuance in August and September. Note these fiscal measures are already taken into account in this year’s fiscal policy forecast, hence it will not affect our growth forecast.
In stage 2 (October), we believe the government needs to make fiscal adjustments because fiscal revenue growth came in much weaker than expected (-2.6%oya in the first eight months of this year vs. full-year budgetary forecast of 3.3%, while fiscal expenditure rose 1.5% (vs. budgetary forecast of 4%). If fiscal revenue continues to be weak, the government needs to increase the fiscal deficit (or issue additional government bond, or find new funding via asset sales or transfer from stability fund) to avoid undesirable fiscal tightening in 4Q. The gap in fiscal revenue is around 1 trillion yuan. If the NPC approves additional fiscal deficit or additional government bond to fill the shortage in fiscal revenue, the fiscal impulse in 4Q (and the following quarters) tends to be small, as fiscal spending has incurred, even though it will affect our estimate of augmented fiscal deficit in 2024.
In addition, fiscal adjustment may also involve additional special local government refinancing bond to support the ongoing local government hidden debt swap program (like it happened in 4Q23). From a macro perspective, this operation will not affect our estimate of augmented fiscal deficit, as it simply replaces off-budgetary fiscal items (LGFV borrowing) with budgetary items (special local government refinancing bond) and hence has little macro impact.
In stage 3 (October and going forward), the government should roll out additional fiscal stimulus beyond fiscal adjustment, e.g. to support consumption, investment, housing destocking etc. Our forecast has already anticipated measures amounting to around 1trillion yuan, but without any direct support for private consumption. If the news report of a possible 1-trillion yuan support for consumption plays out, there would be grounds for us to revise our growth forecast upward. A “bazooka” fiscal stimulus well above 2 trillion, would belong to the same category. The form and magnitude of new fiscal impulse will determine the magnitude of any growth forecast upgrade.
How it compares to historical easing
Compared to China’s macro policy operation in recent years, the latest policy shift is unusually bold and coordinated. Regarding the three key policy areas (monetary, fiscal, and structural rebalancing), the shift is particularly notable on the monetary policy front, including the PBOC’s direct support for the equity market, the deviation from the piecemeal, cautious monetary easing pace as seen in recent years and a return-to-normal pace of rate cuts and RRR cuts, as well as the use of forward guidance in policy communications.
Meanwhile, in our view, it is important not to over-estimate the policy support package at this stage, especially from a macro perspective. In particular, on the fiscal policy front, as mentioned above, we believe a headline 2 trillion yuan fiscal package is reasonable for the near term (compared to the financial market’s more aggressive expectations), and it will be crucial to watch for details of the measures.
In our view, there is more limited space for monetary and fiscal easing compared to the past, and the structural challenges may hinder the policy pass-through. For instance, housing policies have been steadily relaxed since 2022, and cumulative demand side easing (relaxation in mortgage policies and home purchase restrictions) has exceeded the housing relaxation measures as observed in the past. But these demand-side easing measures may not be a game-changer considering the overwhelming challenges for the housing market and lingering time-inconsistency issues. The latest round of housing relaxation measures may only have a temporary impact on home demand, similar to what we observed in May-June this year and 1Q23 immediately after reopening. The sum total of all the housing measures has simply made investment demand easier (second house purchase). But demand for investment housing will depend on price expectations. In the absence of credible demand for primary housing, a further decline in housing prices is still needed to equilibrate the market. Alternatively, the government can accelerate the pace to reduce housing inventory or undeveloped land, which will help house price expectations. The increase of PBOC relending support ratio from 60% to 100% likely will not be sufficient to achieve this goal. Housing activity may cool off again, and only bottom into 2025 (if measured by home sales or home prices) or even later into 2026 (if measured by real estate investment).
Similarly, we have argued that the key to boost household consumption is to restore employment and income expectations, and to bring down the household saving rate. To achieve that, the government needs to shift policy to support consumption and social welfare, with a more balanced policy support between consumption and investment, and a more balanced support between services and manufacturing sectors to broaden the base of employment and growth. The government will also need to contain excessive competition and enhance the protection of workers’ rights, to ensure an increasing share of household income in economic output.
In the broader historical context, the room for policy stimulus has become more limited nowadays. On the monetary policy front, the PBOC’s policy rate (7-day reverse repo rate) is now at historical low of 1.5%, and RRR has fallen from the peak of 20.5% in early 2012 to current 6.6%. On the fiscal side, augmented fiscal deficit has continued to hover at high levels of 11-13% in recent years, and the level of public debt has reached around 110% of GDP (including 25% central government debt, 35% local government debt and nearly 50% local government hidden debt). While there is room to step up fiscal and monetary easing, policymakers need to balance near term policy easing with long-term fiscal consolidation (if public debt keeps on building up) and monetary policy normalization (if the policy rate approaches zero-lower-bound).
Hence, while some market participants are excited about the policy shift, it is unlikely to repeat the 4-trillion stimulus in 2008-09. Back then, 4 trillion yuan was equivalent to 12.5% of 2008 GDP, the augmented fiscal deficit jumped from 4.7% of GDP in 2008 to 13.7% in 2009, the PBOC cut policy rates by 216bps in four months (from 7.47% in August 2008 to 5.31% in December 2008), and TSF growth jumped from 17.4% in October 2008 to 35.2% in November 2009. This, in our view, is very difficult to replicate. This time, a potential near term 2 trillion yuan fiscal support (even if all is counted as additional fiscal stimulus) is equivalent to only about 1.6% of GDP. Even in a scenario of “bazooka-type” fiscal stimulus, e.g. additional fiscal stimulus of 3-5 trillion yuan per annum in the next 2-3 years (as some policy advisors have recommended), it is equivalent to 2.5-4% of GDP per annum. The magnitude will exceed the fiscal easing in 2015-16 and 2022, but will still be smaller than the 2020 post-COVID fiscal stimulus (augmented fiscal deficit increased by 4.7%pts to 15.2% in 2020).
The complexity of policy easing also comes from the challenge of structural imbalances. Fiscal policy needs to shift the gear to support consumption and services, to boost domestic demand and mitigate deflation pressure and trade tension. It is encouraging to see a policy shift towards that direction, but it is a long journey.
What to watch for next
The policy shift in late September is not an end, but may mark the beginning of a long journey. The announcement of fiscal measures over the coming weekend will clarify near term policy uncertainty and help us to gauge the economic impact in 4Q and early 2025. A series of events are worth watching in the next few months. In late November and early December, policymakers will decide on economic policy for 2025 (e.g. growth target, fiscal and monetary policy stance). Activity data after this round of policy easing, as well as the US election outcome (and the risk of heightened tariff tensions depending on who wins the election) could trigger bolstered fiscal and monetary easing, as well as a more determined shift towards economic rebalancing.

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