The Impact of Bold Economic Stimulus Measures

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Abstract:

In December 2024, the Consumer Price Index (CPI) witnessed a year-on-year increase of merely 0.1%, remaining unchanged on a month-to-month basisThis slight uptick underscores a dreary retail demand against a backdrop of overwhelming supplyConversely, the Producer Price Index (PPI) faced a year-on-year decline of 2.3% and a month-on-month decrease of 0.1%, highlighting persistent oversupply in upstream production sectors while downstream demand continues to lagThe real estate sector remains troubled, evidenced by a significant drop in second-hand housing prices; monetary and macroeconomic policies have proven inadequate in stemming the continuous contraction of prices, largely due to the misalignment of policy focus.

The turning point for China's real estate market can be traced back to July 2021, when a robust growth trajectory suddenly began to falter

Recognizing the looming threats, in December 2021, the central bank initiated a prolonged monetary easing cycle, exemplified by a 5 basis points cut in the one-year loan market quotation rate from 3.85% to 3.8%. Over the subsequent three years, the seven-day reverse repos rate dropped from 2.2% to 1.5%, a 0.7 percentage point reduction; the one-year loan market quotation rate plummeted from 3.85% to 3.1%, while the five-year rate decreased from 4.65% to 3.6%. Furthermore, banks' average reserve requirement ratios saw a decline from approximately 9.15% to about 6.6%, a cut of 2.55 percentage points.

With such lenient monetary policy measures coupled with ongoing calls from the Ministry of Commerce to boost consumption, one must question the efficacy of these monetary and economic policiesHave macro supply and demand conditions improved? December 2024's price index results offer a critical evaluation.

1. CPI increase stagnant at 0.1% year-on-year in December 2024, signaling sluggish retail demand and oversupply.

The national CPI saw a modest 0.1% year-on-year increase in December 2024, a slight deceleration compared to November’s rise

In contrast to three years prior when it climbed 1.5%, the present figures indicate a significant downturn.

Food prices slid by 0.5%, while non-food prices ticked up by 0.2%. Notably, consumer goods experienced a decline of 0.2%, while services surged by 0.5%. This contrasts sharply with December 2021, when food prices entered a decline of 1.2%, non-food prices surged by 2.1%, and consumer goods rose by 0.7% amidst a 1.5% increase in services.

Within the consumer price index, of the eight major categories, five recorded increases while two saw declines, with one unchangedOut of these, the prices for other goods and services surged 4.9%, clothing increased by 1.2%, while education, culture, and entertainment, as well as healthcare, both rose 0.9%. Housing prices crept up by 0.1%, with food, tobacco, and alcohol prices remaining stable, while transportation, communication, and daily goods and services saw decreases of 2.2% and 0.7% respectively.

The overall CPI index for the year marked a significant tumble from a 0.9% uptick in 2021 to a meager 0.2% in 2024.

In December 2024, the CPI remained static compared to the previous month, reversing an earlier 0.6% drop noted in November, largely attributed to seasonal food price adjustments

The month-on-month decline in seasonal food prices was 0.6%, an improvement compared to the 2.7% deduction observed in the prior month, which explained 0.42% of the CPI month's static natureNon-food prices, however, nudged up by 0.1%. Consumer goods experienced a slight 0.1% decrease while service prices saw a marginal increase of 0.1%.

A breakdown of the eight CPI categories revealed that four experienced gains, two remained stable, while two showed declinesNotably, daily goods and services, alongside transportation and communication prices, rose by 0.3%, while clothing and housing respectively saw 0.2% and 0.1% rises; education, culture, and entertainment, and other goods and services held steady; lastly, food, tobacco, and alcohol experienced a drop of 0.3% alongside a 0.1% decrease in healthcare prices.

2. PPI declines by 2.3% year-on-year, reflecting persistent oversupply in production sectors.

In December, the country's PPI recorded a year-on-year fall of 2.3%. Although this represents a narrowing of the decline by 0.2 percentage points compared to the previous month, it marks the 27th consecutive month of year-on-year decrease for the PPI, which had previously surged by 10.3% in December 2021.

For the entirety of 2024, the PPI registered an average descent of 2.2%, a stark contrast to a leap of 8.1% in 2021.

Within December’s PPI data, prices for production materials saw a year-on-year decrease of 2.6%, with a reduction of 0.3 percentage points from the preceding month, while living material costs fell 1.4%, maintaining stable reduction from the earlier month

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The indicators signify acute oversupply issues, particularly pronounced in the retail domain compared to the industrial production sector, aligning with the fact that state-owned enterprises largely dominate upstream energy and raw materials industriesThe phenomenon reveals a stark contrast between decreasing proportions of state holdings and increasing shares of private businesses as one moves downstream within economic production.

Amidst the 30 industrial sectors contributing to the PPI, an overwhelming 24 sectors—accounting for 80%–saw declines in factory prices, while only 6 sectors' prices increased.

The sectors with the steepest price drops included black metal mining, black metal smelting and processing, and petroleum and coal production, which experienced declines of 11.4%, 9.5%, and 8.7% respectively

In contrast, the industries with the most significant price increases comprised non-ferrous metal mining, non-ferrous metal smelting and processing, alongside water supply and production, with price rises of 19.1%, 10%, and 0.5% respectively.

December 2024 recorded a PPI month-on-month decrease of 0.1%, in contrast to a 0.1% increase in NovemberThe previously rising prices of production materials stagnated, while living material prices dipped by 0.1%. These trends illustrate an increasing severity of the oversupply and insufficient demand situation spanning from industrial production to retail channels.

Out of the 30 industries comprising the PPI, 13 witnessed declines in factory prices month-on-month, while 5 remained stable and 12 showed increases.

Specifically, the coal extraction and washing industry, chemical fiber manufacturing, and black metal smelting and processing saw notable declines of 1.9%, 1.4%, and 0.6% in factory prices month-on-month

Meanwhile, industries such as gas and electricity production and supply, as well as paper, experienced significant month-on-month increases of 1.2%, 0.9%, and 0.9% respectively.

In December 2024, the industrial producer purchase price fell by 2.3% year-on-year, although it widened by 0.2 percentage points compared to November, and saw a month-on-month decrease of 0.1%, consistent with November's figures.

3. Real estate prices show continued decline, with new housing price drop narrowing while second-hand housing prices plummet, revealing ongoing lethargy in the market.

Though the National Bureau of Statistics has yet to release the average housing price index for December across 70 cities, compiled data from the China Index Academy indicated that the average price for newly built residences in 100 cities in December 2024 reached 16,654 yuan per square meter, marking a month-on-month increase of 0.37% and a year-on-year rise of 2.68%. Conversely, the second-hand housing average price in 100 cities stood at 14,203 yuan per square meter, reflecting a month-on-month drop of 0.53% and a year-on-year decrease of 7.26%.

It is noteworthy that variations in city selection and pricing collection methods have consistently led the China Index Academy's housing price indices for the 100 cities to be substantially higher than the National Bureau's for the 70 cities

For instance, in November 2024, the former observed a month-on-month increase of 0.36% and year-on-year growth of 2.4%, while the latter noted a respective reduction of 0.2% and a year-on-year decrease of 6.1% in new housing prices.

Using historical curves of the differential between the two, projections estimate a 0.1% month-on-month decline in new housing prices for the National Bureau of Statistics 70 cities in December, alongside a 5.9% decline year-on-yearThe forecasted average annual decrease stands at about 4.9%, contrasting with the cumulative 8.9% drop recorded in 2021.

Continued declines in housing prices highlight that unprecedented real estate stimulus policies have yet to resolve the intrinsic contradictions of the housing market, and the issue of inadequate demand persists unaddressed.

4. Monetary policy and macroeconomic measures failed to curtail ongoing price contraction, attributing this to misdirected policy focus.

From a foundational economic perspective, interest rate hikes curb inflation but may inhibit employment opportunities, while interest rate reductions typically bolster jobs and fuel inflation

For three years, a policy of lowering interest rates and reserve requirements has been employed, with broad monetary supply swelling from 238.29 trillion yuan in December 2021 to 314.13 trillion yuan by November 2024—a 31.8% increaseConcurrently, the stock of social financing surged from 311.96 trillion yuan to 405.6 trillion yuan, marking a 30% growthNonetheless, CPI increases have plummeted from 1.5% in December 2021 to a mere 0.1% in December 2024, while the PPI has fallen from a 10.3% rise to a 2.3% decline over the same periodHousing prices, too, have witnessed a dramatic 8.9% tumble across these three years.

These observations clearly indicate that monetary policies have been ineffectiveChiefly, this stems from a pronounced path dependency evident in all monetary and economic initiatives within this timeframe

From loan allocations to preferential interest rates, industrious policy frameworks, and fiscal expenditure targets—essentially, even consumption-encouraging subsidy schemes—all have firmly tethered to the businesses and supply side, lacking any emphasis on personal income and demand amplification.

Thus, as I have repeatedly advocated, a transition from an investment-driven to a consumption-oriented economic model is urgently necessitated, with a focus on redistributing national income policies from prioritizing public sectors towards prioritizing individuals and their incomes, while social protection systems should shift from a collection-focused approach to enhancing security measures and coverage levelsOnly by aligning all concurrent monetary and economic policies with these three pivotal transitions can we potentiate the uplift in the most vulnerable aspect of the economic recovery chain—namely, consumption within China