As Communist China Turns 75, Can Xi Fix Its Economy?

As China prepares to celebrate Golden Week and mark the 75th anniversary of the People's Republic, the ruling Communist Party has rolled out a series of measures aimed at boosting its ailing economy.

The plans included aid to the crisis-hit country's real estate sector, support for the stock market, cash distributions to the poor and increased government spending.

Stocks in mainland China and Hong Kong posted record gains following the announcements.

But economists warn that these policies may not be enough to solve China's economic problems.

Some of the new measures announced by the People's Bank of China (PBOC) on September 24 were aimed directly at the country's struggling stock market.

The new tools included financing worth 800 billion yuan ($114 billion; $85.6 billion) that can be borrowed by insurers, brokers and asset managers to buy stocks.

Governor Pan Gongsheng also said the central bank would offer support to listed companies that want to buy back their own shares and announced plans to reduce borrowing costs and allow banks to increase lending.

Just two days after the People's Bank of China's announcement, Xi Jinping chaired a surprise meeting of the country's top leaders focused on the economy, known as the Politburo.

Officials have promised to step up government spending to support the economy.

On Monday, on the eve of China's departure for a week-long vacation, the benchmark Shanghai Composite Index jumped more than 8%, its best day since the 2008 global financial crisis. The move caps a rally of five days which saw the index jump 20%.

The next day, with markets closed on the mainland, Hong Kong's Hang Seng rose more than 6%.

“Investors loved these announcements,” said China analyst Bill Bishop.

While investors may have popped champagne corks, Mr. Xi has deeper issues to resolve.

The People's Republic celebrating its 75th anniversary means it has existed longer than the only other major communist state – the Soviet Union – which collapsed 74 years after its founding.

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“Avoiding the fate of the Soviet Union has long been a major concern of China’s leaders,” said Alfred Wu, an associate professor at the Lee Kuan Yew School of Public Policy in Singapore.

One of officials' priorities will be to boost confidence in the broader economy, amid growing fears that the economy will fail to meet its own 5% annual growth target.

“In China, goals must be achieved by any means necessary,” said Yuen Yuen Ang, a professor of political economy at Johns Hopkins University.

“Leaders fear that failing to meet them in 2024 will worsen a downward spiral of slow growth and low confidence.”

One of the main drags on the world's second-largest economy has been a slowdown in the country's real estate market that began three years ago.

Apart from policies aimed at boosting stocks, the recently unveiled stimulus plan also targeted the real estate sector.

It includes measures to increase bank lending, reduce mortgage rates and reduce minimum down payments for second home buyers.

But some doubt whether such measures will be enough to consolidate the real estate market.

“These measures are welcome but unlikely to make a difference in isolation,” said Harry Murphy Cruise, an economist at Moody's Analytics.

“China's weakness comes from a crisis of confidence, not a credit crisis; businesses and families don't want to borrow, even though it might be cheap.”

At the Politburo session, leaders pledged to go beyond interest rate cuts and tap public funds to spur economic growth.

However, beyond setting priorities such as stabilizing the housing market, supporting consumption and boosting employment, officials have provided few details on the size and scale of public spending.

“If fiscal stimulus measures fail to meet market expectations, investors may be disappointed,” warned Qian Wang, chief economist for the Asia-Pacific region at Vanguard.

“Moreover, cyclical stimulus measures do not solve structural problems,” Wang noted, suggesting that without deeper reforms, the problems facing China's economy will not disappear.

Economists see tackling deep-rooted problems in the housing market as key to turning around the economy as a whole.

Real estate is the biggest investment most families will make and falling property prices have helped shake consumer confidence.

“Ensuring the delivery of pre-sold but unfinished houses would be essential,” indicates a note from Sophie Altermatt, economist at Julius Baer.

“In order to increase domestic consumption in a sustainable manner, budgetary support for household income must go beyond one-off transfers and instead involve improving pension and social security systems.”

On the day of the 75th anniversary, an editorial in the state-controlled People's Daily struck an optimistic tone, acknowledging that “although the road ahead remains difficult, the future is bright.”

According to the article, concepts created by President Xi, such as “high-quality development” and “new productive forces,” are essential to paving the way for a better future.

The emphasis on these ideas reflects Xi's desire to move away from the rapid growth engines of the past, such as real estate investment and infrastructure, while trying to develop a more balanced economy based on high-end industries .

The challenge facing China, according to Ms Ang, is that “the old and new economies are deeply intertwined; If the old economy collapses too quickly, it will inevitably hamper the growth of the new.”

“This is what leaders have become aware of and are responding to.”