China’s New Stimulus: Will It Be Enough to Rebuild the Construction Sector?

China has launched another economic stimulus package, aimed at addressing the persistent challenges of slow economic growth and a struggling real estate sector. On September 24, 2024, the People's Bank of China (PBOC) unveiled a broad set of measures combining monetary easing and support for the real estate market. This comes as China's GDP growth in the first half of 2024 fell to 3.2%, significantly below the government’s 5% target. The construction sector, one of China’s critical growth engines, has suffered from weak demand, heavy developer debt, and falling property sales. In this article, we will break down the new stimulus package, examine previous efforts, and evaluate whether these measures can effectively revitalize China's construction industry.

Key Elements of the September 2024 Stimulus Package

The new stimulus package targets liquidity improvement, reduced borrowing costs, and real estate sector relief. Key measures include:

1. Reserve Requirement Ratio (RRR) Reduction: The PBOC cut the RRR for banks by 50 basis points, unlocking 1.2 trillion yuan (approximately $164 billion) for lending. This will increase liquidity and facilitate easier access to credit for businesses and consumers, including those in construction.
2. Interest Rate Cuts: The medium-term lending facility (MLF) rate was reduced by 10 basis points to 2.45%, and the one-year loan prime rate (LPR) dropped to 3.45%. These reductions are aimed at lowering borrowing costs across the economy, encouraging investment, especially in real estate and infrastructure projects.
3. Mortgage Rule Adjustments: The minimum down payment for first-time homebuyers was lowered to 15%, with second-time buyers eligible for 25% down payments. With home sales down 8.8% year-on-year by August 2024, this move seeks to reignite interest in the property market, providing support for developers and contractors.
4. Fiscal Stimulus for Infrastructure: China is also stepping up its fiscal support by committing another 1 trillion yuan to infrastructure projects, which are part of a larger 3 trillion yuan plan initiated in 2023. Projects will focus on transportation, utilities, and public services, sectors that provide immediate boosts to construction demand.

Previous Stimulus Packages: How Do They Compare?

The September 2024 package is not China’s first attempt to stimulate the economy in recent years. A look at previous packages reveals their varied impact on construction and real estate:

1. 2008 Financial Crisis Stimulus: During the global financial crisis, China launched a massive 4 trillion yuan ($586 billion) package focused on infrastructure. This represented about 13% of China’s GDP at the time, triggering a construction boom and sustaining economic growth. By comparison, the current 2024 package is smaller, accounting for just 0.8% of GDP.
2. 2020 COVID-19 Stimulus: The onset of the COVID-19 pandemic led to a 6 trillion yuan ($870 billion) stimulus. While infrastructure investment played a role, the effects were dampened by delays in project execution and lingering weak demand. The construction sector, despite the influx of funds, faced obstacles such as labor shortages and strict pandemic-related restrictions.
3. 2023 Infrastructure Stimulus: A more targeted effort, the 2023 package allocated 1 trillion yuan toward infrastructure, with a focus on local projects. However, its impact on the construction sector was limited due to high levels of local government debt, which constrained their capacity to finance projects.

Can the New Stimulus Boost Construction?

While the latest stimulus package could provide a much-needed boost to the construction sector, it faces several hurdles:

1. Real Estate Developers’ Debt: Chinese real estate developers are grappling with overwhelming debt. Evergrande, for instance, reported liabilities exceeding $300 billion by 2022, and Country Garden also faced liquidity challenges in 2023. While the new mortgage rules may help boost demand, developers' ability to fund new projects is restricted by their debt burdens. The overall real estate investment has declined by 5.3% in the past year, indicating a slow recovery.
2. Consumer Confidence and Demand: Home sales continue to struggle, with an 8.8% decline year-on-year as of August 2024. The government’s goal is to stimulate demand, but whether reduced mortgage rates and down payment thresholds can revive buyer confidence remains uncertain. Consumer sentiment has been dampened by falling property values and a glut of unsold homes.
3. Local Government Debt: Infrastructure investment could stimulate construction activity, but local governments—which account for much of the country’s infrastructure spending—are heavily indebted. Local government debt surpassed 120% of GDP in 2023, limiting their ability to fund new projects. While the central government’s support can help, fiscal constraints at the local level may slow project rollout.
4. Construction Output Declines: The construction sector is still recovering from significant setbacks in 2023, which saw housing starts decline by 26%. This, combined with structural challenges such as oversupply in several regions, continues to weigh on the sector. Construction activity, which accounted for over 29% of China’s GDP in 2022, needs to rebound quickly for the broader economy to recover. However, developers are cautious amid uncertainties in the market.

Conclusion: Temporary Boost or Long-Term Recovery?

The 2024 stimulus package could provide a temporary lift to China’s construction sector, particularly through measures designed to stimulate liquidity and demand in real estate. Lower interest rates, relaxed mortgage policies, and fiscal infrastructure spending all offer some hope of a rebound.

However, deep-seated challenges—ranging from developer debt to declining consumer confidence and local government fiscal stress—suggest that any recovery may be slow and uneven. The scale of this stimulus, while significant, does not match the scale of past efforts like the 2008 package, raising questions about whether it can deliver long-term results.

In conclusion, while the new measures may help stabilize construction in the short term, more structural reforms and aggressive fiscal policies are likely needed to ensure sustained growth in the construction sector. Without these, the sector may continue to face prolonged difficulties, limiting its ability to drive economic recovery.