Hong Kong — After four challenging years marked by economic uncertainty and pandemic-induced disruptions, there’s a glimmer of hope for Francis Lun, the owner of a small 10-person brokerage firm in Hong Kong. For much of this period, Lun watched helplessly as the city’s key financial indicator, the Hang Seng Index, continued its unprecedented decline, driven by economic struggles and stringent COVID-19 restrictions in both Hong Kong and mainland China.

However, in late September, a significant shift occurred when China’s leadership introduced an extensive series of stimulus measures aimed at revitalizing the country’s faltering economy. In the wake of these announcements, the Hang Seng Index saw a remarkable recovery, surging more than 18%—marking its most substantial two-week gain in nearly two decades. For Lun, while these stimulus measures might have been long overdue, their arrival has brought a sense of relief. “We were counting the days with no business before this,” Lun explained in his office in the Causeway Bay district. “But now, things are starting to move, and we’re finally getting calls again.”

While the markets in both Hong Kong and mainland China have reacted positively to the new policies, the critical question remains: Will this rally sustain? More importantly, will these economic benefits extend beyond the stock market to address the broader challenges facing China’s real economy? Economists warn that China may face a deflationary spiral, which could further jeopardize the country’s ability to meet its ambitious target of 5% GDP growth this year.

A Limited Focus on Monetary Policy

So far, China’s efforts have been primarily centered on monetary policy, typically involving decisions made by central banks to influence borrowing costs and manage inflation. These include interest rate cuts and adjustments to banks’ reserve requirements. However, Beijing has been hesitant to unveil more aggressive fiscal measures, which could involve adjusting taxes or increasing public spending to further stimulate economic growth.

“The real challenge lies in a lack of consumer confidence,” wrote economists from Nikko Asset Management in a recent research note. They argue that while monetary policy is important, what China truly needs is a more robust deployment of fiscal policies—the so-called “big guns”—to rebuild consumer confidence, increase risk appetite, and stimulate economic activity across sectors.

Renowned investor Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund, echoed these sentiments in a recent social media post, suggesting that this could be China’s “whatever it takes” moment—if its leaders commit to significantly expanding their efforts beyond the measures already announced.

Transparency and Urgency in Policy Announcements

Economists have noted that the manner in which China’s recent policies were introduced signals a shift in the leadership’s approach. A joint press conference on September 24, featuring key figures such as People’s Bank of China Governor Pan Gongsheng and heads of major financial regulatory bodies, was an unusual occurrence. It marked a departure from the opaque, carefully worded statements of the past that often left analysts guessing Beijing’s true intentions.

This time, the officials communicated directly with both local and international media, signaling a clear intent to increase transparency. During the event, Governor Pan outlined several key measures, including cuts to interest rates, reductions in banks’ reserve requirements, and adjustments to mortgage policies aimed at supporting the ailing real estate sector. By lowering down payments for second-home buyers and reducing mortgage rates, Beijing is attempting to address what many economists believe is the root cause of China’s economic troubles: the struggling property market.

HSBC economists, in a recent investor note, emphasized the significance of this new level of transparency and urgency. “This time is different,” they said, pointing to the coordinated nature of the announcements. However, they cautioned that this is just the beginning, with much more likely to come.

Anticipated Fiscal Stimulus

Beijing is expected to introduce further stimulus measures in the coming weeks. Reuters recently reported that China’s Ministry of Finance plans to issue approximately 2 trillion yuan (about $284 billion) in special sovereign bonds later this year as part of a broader fiscal stimulus package. These funds are expected to be allocated to several key areas, including subsidies aimed at encouraging consumers to purchase big-ticket items such as home appliances and upgrading industrial equipment.

One particularly notable aspect of the proposed spending plan involves providing monthly allowances for families with two or more children, aimed at alleviating financial pressures on households and boosting consumer spending.

Despite these initiatives, some economists believe that China’s leadership could afford to be even more ambitious. Jia Kang, a former director of a think tank linked to China’s Ministry of Finance, suggested that the government should consider issuing long-term bonds worth up to 10 trillion yuan ($1.4 trillion) to fund large-scale infrastructure projects and public works that the private sector may not be able to finance on its own.

Jia pointed to China’s previous fiscal response to the 2008 global financial crisis, when the government rolled out a four trillion yuan stimulus package. With the economy significantly larger today, Jia believes China can comfortably support even larger bond issuances, which could provide a substantial boost to growth.

The Road Ahead

While economists debate the exact measures needed to restore China’s economic momentum, there is a consensus that any meaningful stimulus must tackle the chronic oversupply plaguing the real estate market. As BNP Paribas Asset Management’s Chi Lo noted, while the recent policy shift has led to a sharp rally in Chinese stocks, a more sustained recovery in both the economy and financial markets will require continued commitment and confidence in a full economic turnaround.

The coming weeks will be critical as Beijing navigates its next steps. With expectations building around further fiscal policies and the potential for more ambitious measures, the world is watching to see if China can effectively steer its economy out of its current downturn and back onto a path of sustained growth.