Why China's massive stimulus effort might not have any effect until next year

• The direct effects of China's latest stimulus may not kick in until 2025, one researcher says.
• That's because Beijing needs to ramp up spending in addition to monetary stimulus measures.

China's massive stimulus package may not have any direct effect until 2025, and according to Tianlei Huang, a researcher for the Peterson Institute for International Economics, Beijing needs to do way more to boost its ailing economy.

In a note on Tuesday, Huang weighed in on China's latest monetary stimulus package, which includes cutting interest rates, reducing reserve requirements for banks, and injecting around $114 billion in liquidity support.

Those measures sent Chinese stocks on a historic rally last week, and yet, they still may not be enough to drive a full recovery of China's economy, Huang said.

Lower interest rates, for one, may not entice households and businesses to borrow, or banks to ramp up lending, given China's already-sluggish economic environment. That means some of the stimulus flowing towards banks may end up flowing back towards the government, as banks could sow the funds into government bonds, Huang speculated.

Lower rates may also not be enough to nudge China's property market into recovery mode. Many households stopped seeing housing as a "preferred asset class" in the midst of the nation's property crisis, something that will be hard for policymakers to undo, he added.

"The central bank's interest rate cuts and other policy moves could be ineffective—'pushing on a string'—at a time of weak credit demand, as monetary easing during a downturn does not always work as well as tightening during a boom," Huang wrote.

"Moreover, the steps announced so far do not address the deep-rooted problems in China's economy that weigh on its growth, including Beijing's increasing prioritization of national security over economic development, its discrimination against the private sector, and its inadequate fiscal policies."

In particular, Beijing needs more fiscal stimulus to go alongside its monetary stimulus measures, Huang said.

But additional government spending likely isn't coming anytime soon. The nation is poised to "significantly short" on spending in its budget this year, he estimated.

Beijing has an option of making a mid-year budget adjustment at the National People's Congress Standing Committee meeting in late October. But, given lags in the legislative process, any additional funds probably won't open up until the of the year, and they probably won't be spent until the spring of the following year, Huang said.

"The direct effect of such a fiscal stimulus may thus not show up until next year. The indirect effect of such efforts—namely, increased confidence of firms and households, leading them to boost investment and consumption—is likely to be more important," he wrote.

Experts have warned that China's economic problems could stick around for the long term given some of the nation's deep-rooted issues, like its population decline. At the current pace, Beijing is on track to lose half of its population by the end of the century, a 2023 estimate from the Terry Group found, which is likely to significantly crimp economic growth.