Why China's massive stimulus measures may not have a direct impact until 2025

• The direct impact of China's latest stimulus plan may not materialize until 2025, a researcher says.
• This is because Beijing needs to increase its spending in addition to monetary stimulus measures.
• Due to delays in the legislative process, more funding is not expected to be available until the end of the year.

China's massive stimulus package may not have a direct impact until 2025, and Beijing needs to do much more to stimulate its ailing economy, according to Tianlei Huang, a researcher at the Peterson Institute for International Economics.

In a note on Tuesday, Huang commented on China's latest monetary stimulus package, which includes a cut in interest rates, a reduction in reserve requirements for banks and about $114 billion in liquidity support.

Those measures gave Chinese stocks a historic boost last week, and yet they still may not be enough to drive a full recovery in China's economy, Huang said.

For one thing, lower interest rates are unlikely to encourage households and businesses to take out loans, or encourage banks to increase lending given China's already sluggish economy. Huang speculated that this means some of the stimulus going to banks could end up going back to the government, as banks could put the funds into government bonds.

Lower interest rates may also not be enough to put China's real estate market into recovery mode. Many households no longer viewed housing as a “preferred asset class” amid the country's housing crisis, which would be difficult for policymakers to reverse, he added.

“The central bank’s interest rate cuts and other monetary policy measures may remain ineffective—'press on a string'—at a time of weak credit demand, as easing monetary policy during a downturn does not always work as well as tightening during a boom,” Huang wrote.

“Furthermore, the steps announced so far do not address the deep-rooted problems in China’s economy that are weighing on its growth, including Beijing’s increasing prioritization of national security over economic development, its discrimination against the private sector and its inadequate fiscal policies.”

In particular, Beijing needs more fiscal stimulus in parallel with its monetary stimulus measures, Huang said.

But additional government spending is unlikely to come quickly. He estimated that the country is likely to see “significantly tight spending” in its budget this year.

Beijing has the opportunity to make a mid-year budget adjustment at the National People's Congress Standing Committee meeting at the end of October. But given the delays in the legislative process, additional funds likely won't be available until the end of the year, and they probably won't be spent until the spring of the following year, Huang said.

“The direct effect of such a fiscal stimulus may therefore only become apparent next year. The indirect effect of such efforts – namely, increased confidence among businesses and households, leading them to boost investment and consumption – may be more important,” he wrote.

Experts have warned that China's economic woes could persist in the long term due to some of the country's deep-rooted problems, such as population decline. A 2023 estimate by the Terry Group found that at current rates, Beijing is on track to lose half of its population by the end of the century, likely slowing economic growth significantly.