China’s Leadership Reverses Course with Aggressive Economic Stimulus

China’s leadership has stunned markets with a dramatic shift in its approach to economic stimulus. President Xi Jinping, who for years resisted massive fiscal injections into the economy, is now spearheading one of the most aggressive stimulus efforts since the pandemic. Brokers in Shanghai spent the week-long national holiday working overtime, testing systems after September’s market crash.

Retail investors rushed back into stocks following the announcement of China’s largest stimulus package yet, causing the Shanghai Stock Exchange to overload and shut down. This sudden pivot marks a new era for China’s economic strategy, as Xi and his policymakers now focus on saving the world’s second-largest economy after years of declining markets.

China’s leadership could no longer ignore the ongoing real estate slump and mounting local government debt that had been draining resources for years. The country’s property market, once the bedrock of economic growth, now faces a crisis. Property prices have failed to stabilize, and local governments are struggling to cover their bills. Beijing faced the real possibility of missing its official GDP growth target of 5% this year, with the latest data showing only 4.6% growth for the third quarter—the lowest in a year and a half.

To address the economic downturn, China’s central bank and financial regulators launched a series of stimulus measures, including interest rate cuts, support for homeowners, and unprecedented assistance for the stock market. Two weeks later, the finance ministry announced an additional layer of fiscal stimulus aimed at bailing out local governments, recapitalizing banks, and purchasing millions of unsold apartments.

While Beijing has promised that this fiscal package will be the largest in “recent years,” the exact size remains unclear. Xi Jinping has referred to the measures as a “combination punch,” intended to knock out the economic challenges. However, economists question whether these punches will be powerful enough, given the multiple issues China faces, including high government debt, demographic decline, and growing tensions with trade partners.

Youth unemployment surged to 18.8% in August, up from 13.2% just two months earlier, as people became more focused on saving rather than spending. Chinese producers have also been grappling with deflation for the past two years, with corporate profits under immense pressure and exports unexpectedly dropping in September.

The dire economic situation forced Xi and his inner circle to act. In July, China’s leadership began to worry about missing growth targets following their third plenum—a closed-door policy meeting held every five years. Publicly, Xi remained confident, even appearing relaxed during his visit to Gansu province in September. However, behind the scenes, alarm bells were ringing, and it became evident that decisive action was needed.

Xi is walking a fine line between reviving the economy and avoiding the pitfalls of past strategies. He is reluctant to return to the old playbook of piling on debt in traditional sectors to drive growth. Instead, Xi is focusing on “new productive forces,” such as green energy and advanced semiconductors. Beijing is also prioritizing reforms like raising the retirement age and loosening the hukou system, which restricts migrant workers’ access to services. These changes aim to tackle long-term issues but may fall short of addressing the immediate need to stimulate consumer spending.