China’s Stimulus Push: Wage Hikes, Rate Cuts, and AI-Driven Growth

China Announces Fresh Stimulus Pledges as Labor Market Weakens

On Sunday, March 16, China’s State Council and CPC Central Committee unveiled plans to revive consumption and domestic demand. Significantly, Beijing’s measures focused was on driving income growth, bolstering consumption capacity, and optimizing the consumption environment.

Key measures included:

• Raising minimum wages.
• Expanding work-relief programs.
• Tackling wage arrears across the SME space.

Sunday’s pledges followed the People’s Bank of China’s (PBoC) commitment earlier this month to economic support amid US-China trade tensions. Key pledges included:

• Cutting interest rates and Reserve Requirement Ratio (RRR) when required.
• Introducing new policy tools to drive tech innovation, consumption, and trade.
• Lowering social financing costs while increasing liquidity.

Lower interest rates can reduce mortgage costs, potentially making homes more affordable and freeing up disposable income for consumers. A lower RRR may expand banks’ lending capacity for real estate loans. Lower interest rates may also increase consumer demand for big-ticket items, including appliances and vehicles.

Consumer Confidence and Unemployment Levels Challenge 2025 GDP Target

While Beijing continues rolling out policy pledges, several factors may limit the effectiveness of monetary policy and fiscal stimulus:

• Rising unemployment: China’s unemployment rate rose from 5.2% in January to 5.4% in February.
• Depressed Consumer Sentiment: China’s Consumer Confidence Index climbed from 86.2 in November to 86.4 in December. Despite the increase, consumer confidence remained near historic lows.

Despite a modest uptick in consumer confidence, further labor market weakness could erode sentiment. Waning sentiment may dampen consumer spending, curbing the impact of stimulus measures.

Expert Opinions Reflect Mixed Sentiment

Reactions to China’s latest economic indicators vary:

• East Asia Econ: “The summary is a cycle that isn’t deteriorating, but doesn’t show a clear rebound either.”
• Alicia Garcia Herrero, Natixis Asia Pacific Chief Economist: “China’s data in February was very positive: industrial production, retail sales, and fixed asset investment were higher than expected. The stock market rally is bound to continue, especially given the mess in the US and foreign investors are already jumping on them (USD11b in equity inflows last).”
• Organization for Economic Co-operation and Development (OECD): “OECD raises 2025 Chinese growth forecast to 4.8% from 4.7%, leaves 2026 forecast unchanged at 4.4%. OECD cuts US 2025 growth forecast to 2.2% from 2.4% and 2026 to 1.6% from 2.1%.”

Diverging economic growth prospects and China’s policy support have fueled demand for Hong Kong and Mainland China-listed stocks. In contrast, US markets have faced intensifying selling pressure in Q1 2025.

Market Response: Hong Kong and Mainland Stocks Gain, Nasdaq Trails

Optimism surrounding China’s economic policies, including AI-tech advancements, has driven the Hang Seng Index to its highest level since February 2022. The Hang Seng Index has gained 5.25% in March, pushing Q1 2025 gains to 20.4%. Alibaba Group Holding Ltd. (09988.HK) has soared 64.44% in Q1 2025 on AI and tech advancements, contrasting with Nvidia Corp.’s (NVDA) 11% decline.

Beijing’s monetary and fiscal policy support has also bolstered demand for Mainland China-listed stocks. The CSI 300 and Shanghai Composite Index have risen 1.57% and 2.22%, year-to-date, despite the increasing risk of a full-blown US-China trade war.

Meanwhile, the Nasdaq Composite Index has fallen 7.78% YTD, underscoring shifting sentiment toward the US economy.

Looking Ahead: Policy Decisions, Trade Risks, and Market Sentiment

The escalating risk of a full-blown US-China trade war could impact investor sentiment. However, China’s AI developments and Beijing’s policies may mitigate tariff risks, reinforcing economic divergence between the two nations.

Key upcoming events:

• Wednesday, March 19: The Fed announces its interest rate decision and releases quarterly FOMC Economic Projections.
• Thursday, March 20: The People’s Bank of China (PBoC) sets its Loan Prime Rates.

A hawkish Fed and further PBoC rate cuts could accelerate capital flows from the US to Hong Kong and Mainland China markets.

Stay ahead of market trends—explore our latest analysis on China’s economy and global markets here.