China won’t unleash ‘runaway stimulus’ to revive the economy

China’s economic slowdown is causing alarm around the world, but President Xi Jinping’s government may be willing to go only so far to limit the damage.

Beijing on Tuesday announced 1.3 trillion yuan ($193 billion) worth of new measures designed to stimulate the economy, including tax cuts for small businesses and reduced tariffs. It’s the latest in a flurry of government efforts to prop up growth in recent months, such as boosting infrastructure spending and looser monetary policy.

Weakening growth in the world’s second biggest economy combined with the trade war with the United States has spooked investors and prompted warnings from top companies like Apple (AAPL).

Experts question whether Beijing’s measures will be enough to stimulate the economy.

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“It’ll take a lot more to pull China out of what feels like a recession,” said Scott Kennedy, an expert on the Chinese economy at the Center for Strategic and International Studies in Washington.

The country’s official growth rate is expected to be around 6.5% for 2018, the weakest in nearly three decades, and to drop closer to 6% this year. But many analysts are skeptical about the accuracy of the government figures and say growth may be significantly lower in reality.

Plenty of signs are flashing red. In December, Chinese exportssuffered a surprise decline, whileannualcar sales in 2018 fell for the first time in around 20 years.

A woman working at a textile factory in Haian, Jiangsu, China. In December, prices of Chinese manufactured goods rose at a much slower pace than expected.

Preventing growth collapsing

Part of the problem is that China’s easing measures could be hitting the wrong targets. The central bank has gradually cut the amount of cash commercial banks are required to hold as reserves. That should mean banks have more money to lend to businesses, encouraging investment and economic activity.

Output from China's huge factory sector shrunk in December for the first time in two-and-a-half years.

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“The problem is that [this] money doesn’t flow into the real economy,” Larry Hu, chief China economist at investment bank Macquarie, said in a note to clients this month.

Banks are instead parking the cash in Chinese government bonds or lending to inefficient, state-run businesses, which often use it to rollover their existing debts. This money would be more effective if it was directed to private businesses, according to Hu.

Rather thanfueling a rebound, the central bank’s recent cuts may only “prevent growth from truly collapsing,” said Christoper Balding, a China expert at the Fulbright University Vietnam in Ho Chi Minh City.

More stimulus incoming

Burgeoning evidence that the slowdown is getting worse makes more stimulus measures all but certain.

In recent months, Beijing has moved ahead with plans for billions of dollars of new railway projects and tax cuts for small businesses. Officials also say they are preparing measures to help the struggling auto industry.

Apple on Wednesday said that it expected a weaker Chinese economy to hurt its holiday sales numbers.

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But Beijing’s efforts won’t kick in straight away.

“It will take several more months of easing before the economy and stock market begin to feel the benefit,” said Chen Long, an analyst at research firm Gavekal.

Chinese stocks had a miserable 2018, suffering from the slowdown and the trade hostilities with the United States. And until stimulus measures start having a real effect, “market momentum is going to deteriorate further,” Long said.

Lessons from the ‘big bang’

China’s plans this time around are small change compared with the “big bang” stimulus it launched in response to the global financial crisis. In 2008 and 2009, Beijing injected nearly $600 billion into its economy to fight off the effects of the global slowdown.

“China still has a lot of ammunition” in terms of the moves it can make, said Jeff Ng, chief Asia economist at research firm Continuum Economics. But he warned that “there are side effects.”

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One concern is the huge amount of debt in the country’s financial system. The Chinese economy expanded rapidly in the years after the global financial crisis thanks to repeated debt binges. But that left it nursing a hangover.

President Xi and other top officials have in recent years pressed China’s financial system to cut down on riskier lending, a campaign often referred to as “deleveraging”. But as the economy has weakened, the priority has shifted.

“In view of the extraordinary difficulty that China is facing amid trade tensions, China is willing to halt its deleveraging efforts in order to defend growth,” said Janet Mui, an economist at investment firm Cazenove Capital in London.

Losses in the stock market have increased the pressure on authorities to keep adding stimulus, she said.

The risks of ‘runaway stimulus’

But too much stimulus runs the risk of adding to China’s already worrisome debt levels.

It could also pile pressure on the country’s currency, which despite a recent rally is still down significantly against the dollar over the past year. That could lead to renewed fears of investors moving huge sums of money out of China and increase trade tensions with the Trump administration, which has repeatedly accused Beijing of weakening its currency to boost Chinese exporters.

Police officers watching a cargo ship at a port in Qingdao in 2018. China's official growth rate for last year is expected to be around 6.5%, the weakest in nearly three decades.

“Chinese policymakers are wary of broad-based stimulus in high dosages,” said Darren Tay, a country risk analyst at research firm Fitch Solutions. “Loosening monetary policy too quickly could indeed cause the yuan to weaken quickly.”

Repeated injections of cash into the economy may also add fuel to China’s red-hot property market and damagingly distort its industrial sector.

In December, prices of Chinese industrial and manufactured goods rose at a much slower pace than expected. Some analysts suggest this may mean China is again starting to suffer from overcapacity — production that exceeds demand and lowers global prices.

“We believe Beijing is painfully aware of these risks, which is why we do not expect runaway stimulus this time around,” said Tay.

Nanlin Fang contributed to this report.