Blog: You, us, everyone

China's central bank lowered interest rates and injected liquidity into the banking system, backed up by a special loan amounting to trillion yuan ($284.43 billion), to ditch the economic growth path, back to the annual target of roughly 5%.

Yet, according to research obtained, the most recent stimulus package will impact output by just about 0.4%, so no real big deal – the only thing it did, it fast-tracked the stock market, which experienced the best monthly performance ever since 2008.

China’s economy faces strong deflationary pressures due to a sharp property market downturn, overfocused infrastructure spending, badly managed projects aka corruption, and frail consumer confidence, which have exposed its over-reliance on exports in an increasingly tense global trade environment.

For the government to act now indicates that the policymaker's pain threshold has gone beyond the supportable level, which in turn stipulates, in pure and plain vanilla Chinese, that pans of economic activities are in a much worth state than admitted. Therefore, they are concerned that the long-term growth date was at risk as a longer-term structural slowdown could be in play. But, does the present stimulus program fix the real issue? We are not that sure!

Under the present program, the Central Bank is expected to release 1 trillion yuan ($142.5 billion) in liquidity into the banking system which was accompanied by a cut in the benchmark interest rate on seven-day reverse repurchase agreements by 20 bps to 1.50%. The program will also be used to provide a monthly allowance of about 800 yuan, or $114, per child to all households with two or more children, excluding the first child.

Most of China's fiscal stimulus still goes into investment, but returns are dwindling and the spending has saddled local governments with $13 trillion in debt, much of which has financed worthless projects.

The looming fiscal measures would mark a slight shift towards stimulating consumption, a direction Beijing was reluctant to engage for more than a decade, but has made little progress on it.

China's household spending is less than 40% of annual economic output, some 20 percentage points below the global average. Investment, by comparison, is 20 points above but has been fueling much more debt than growth. The politburo also pledged to stabilize the troubled real estate market, saying the government should expand a white list of housing projects that can receive further financing and revitalize idle land.

First and foremost, the present 'shock and acknowledge therapy' is supposed to jumpstart the markets and boost confidence. But eventually, Beijing is still short of introducing well-thought policies to upgrade its economic and political system and to address many of the deep-rooted problems, particularly within the property sector. For now, the country is too dependent on US and European consumption, the only local engine it has is to expand an already rich infrastructure.