China's recently announced macroeconomic support measures reflect growing concerns about a weakening economic growth outlook and a rising risk of deflation; however, the measures' scale falls short of what is needed to maintain 5% growth and stop deflation, as authorities continue to resist a large, consumption-oriented fiscal stimulus. Over the past few weeks, Chinese authorities have taken several steps to provide macroeconomic support to the economy amid rebalancing away from real estate sector-focused growth. On Sept. 24, the People's Bank of China announced a larger-than-usual monetary stimulus package. The Chinese central bank also lowered reserve requirements for banks, cut interest rates, lowered mortgage rates and introduced policy measures to support the equity market. Additionally, the government announced its intention to bring forward the issuance of 200 billion yuan (or less than $30 billion) worth of bonds from the 2025 budget to lend greater fiscal support to the economy.

• China's economy grew 5.2% in 2023 and 5% during the first half of 2024, and the government's growth target for 2024 is ''around 5%'' of real gross domestic product. The IMF projects that China will reach its 2024 goal of 5% but that growth will slow to 4.5% in 2025 and 4.1% in 2026. The IMF also projects that China's real GDP growth will slow to 3.3% by 2029 due to reduced productivity growth, adverse demographics and increasing international economic fragmentation, absent broader structural reform.
• In 2020, Chinese authorities introduced ''three red lines'' to force financial deleveraging on real estate developers to limit real estate sector and systemic financial risks, as well as slow the oversupply of housing. This policy was also aimed at reallocating investment from low-productivity real estate to other higher-productivity economic sectors. At the time, the real estate sector was estimated to account for 25%-30% of China's GDP.

The announced measures signal increasing concerns about China's economic outlook and risk of deflation, even as Beijing emphasizes innovation- and industrial-focused growth. China's economy has struggled to pick up speed for years, and policymakers hope the greater macroeconomic stimulus will support house prices, whose growth has historically bolstered consumer confidence and domestic consumption, to maintain economic growth at close to 5% while reducing the risk of deflation. Policymakers are particularly concerned about deflation becoming more entrenched and triggering a debt-deflation spiral, which would further weigh on economic growth and present a risk to broader financial instability as China's real debt burden increases. Meanwhile, the announced measures reflect policymakers' strong commitment to promoting ''new quality productive forces,'' which focus on manufacturing-focused industrial policies and government-supported investment over large-scale consumption-focused fiscal measures to support economic growth.

• China's producer price index has been in negative territory for almost two years. China's core consumer price inflation was last negative in January 2021 during the height of COVID-19, but in August 2024 core inflation fell to 0.3%, or less than half its level a year earlier. 
• China's total non-financial debt exceeds 300% of GDP, which is very high even though a high national savings ratio underpins it. Corporate debt exceeds 130% of GDP. While general government debt amounts to a seemingly manageable 60% of GDP, augmented debt (including local government-backed investment funds focused on infrastructure) is approaching 130% of GDP. Meanwhile, China's augmented fiscal deficit remains very high in the context of sharply lower nominal GDP growth.

Chinese policymakers will likely continue to support growth incrementally rather than opt for a major fiscal stimulus, which will prove insufficient to revive consumer confidence, maintain 5% growth and reverse deflation. Policymakers are reluctant to implement a larger stimulus package due to concerns about malinvestment (poor investments due to low or even negative economic and financial returns), financial write-downs and unbalanced economic growth. As a result, a large fiscal stimulus remains unlikely unless economic growth craters and deflation risks become entrenched. Absent more forceful measures, the outlook for short-term economic growth will diminish further and lead Chinese growth to fall below 5% in 2025. Additionally, the risk of deflation will remain elevated, which will do little to revive economic confidence and domestic consumption. Moreover, policymakers' continued reliance on investment-oriented fiscal policy means Chinese exports will remain elevated, stoking trade tensions with other countries, particularly those in the West; however, incremental policies will enable policymakers to launch counter-cyclical economic measures if these trade tensions rise too high and/or if the next U.S. administration relaunches an economically destabilizing trade war. On the flip side, Chinese policymakers might support a larger fiscal stimulus focused on strengthening household consumption if full-year growth projections fall below 4% in the near term and deflation reaches 1% year on year for more than a quarter. A large fiscal stimulus would include additional full-year fiscal spending measures worth 4%-5% of GDP. 

• China's 2008-09 fiscal and quasi-fiscal stimulus in response to the global financial crisis predominantly focused on investment, such as public infrastructure investment, rural development and industrial upgrading. It exceeded 10% of China's 2009 GDP and raised concerns about economic sustainability that continue to inform policymakers' decisions. 
• Both the United States and the European Union have introduced protectionist measures targeting Chinese electric vehicles, among other goods. Other countries, such as Brazil, have imposed tariffs on Chinese steel imports.
• Private sector economists from banks like Australia's Macquarie Group Ltd. and the United Kingdom's HSBC Holdings put the total stimulus required to increase the output of China's economy at 5-10 trillion yuan. U.S. investment bank Morgan Stanley estimates China's economy would need 10 trillion yuan over 24 months to increase output and return to stable growth. This is roughly equivalent to 7%-8% of GDP annually and would massively widen the fiscal deficit.