China unleashed a stimulus blitz on September 24, jolting the markets to try to reverse the previously downbeat narrative on the world’s second-largest economy.
Right from the start, skeptics said it’s just not enough to fix China’s problems, which include an unprecedented property downturn, deflation, and a crisis of confidence, among other issues.
But it’s likely not the last economy-boosting package, said some economists, because China is a top-down system — and the boss has called for it.
“As saving the economy and rescuing stock markets become politically correct, officials could jump on the bandwagon to display their loyalty,” economists from Japanese bank Nomura wrote in a Wednesday note.
Various Chinese ministries and local governments are likely to roll out a variety of stimulus measures in the coming weeks — useful or not, they added. After all, it’s China, and there are consequences for not following the drumbeat.
“Moral suasion in China has somewhat more force than elsewhere. Chinese companies live and die based on whether they are singled out as policy favorites, CEOs sometimes literally,” wrote Freya Beamish and Rory Green, economists from Global Data.TS Lombard, in a September 26 note.
For a start, companies could get some cheap funding from Cina’s central bank — announced as part of the initial package to support the stock market — as a “good way for currying favor,” they wrote.
Boosting stock market sentiment would also help with consumer confidence and inject money into companies, Ben Harburg, the managing partner of MSA Capital, a Saudi Arabia-backed venture capital firm based in Beijing, told Business Insider.
The momentum appears to be underway.
A day after the first stimulus was announced, Beijing announced a rare one-time cash handout for the poor. A day later, a meeting of top leaders addressed economic issues.
The Chinese government’s drive to fire up its economy may not be smooth — or enough — given the scale of its issues. On the flip side, officials may also do too much and cause new problems.
But what about the epic property crisis?
China still has a massive property problem that’s unlikely to be solved with one set of stimulus measures.
A few days after the PBOC’s first announcement, China’s top leaders called time on the real-estate crisis, pledging measures to stabilize the market and halt the decline.
In some countries, this could just be lip service. In China, this is a top-down directive to technocrats to get to work on the pledged goals, including limiting new housing supply, increasing lending to projects on a “white list,” and lowering mortgage rates.
“The most important change there is the new goal: stop the decline in housing,” wrote Larry Hu, the head of China economics at Macquarie Group, in a Thursday note.
He wrote the central government may have to become “the buyer of the last resort” under a program to absorb excess housing capacity and turn vacant units into subsidized housing.
“For a top-down system like China, the change in the property KPI still matters a lot. With it, bureaucrats will exhaust all the policy tools to make it happen,” wrote Hu.
Some economists even view the property support measures as a turning point.
“We regard China’s recent stimulus actions as the initial stages of a genuine policy pivot, particularly regarding the way authorities may be thinking about the economy,” wrote Magdalena Polan, the head of emerging market macroeconomic research at asset manager PGIM Fixed Income, in a Friday note.
She added that while the party line is still that property is not for speculation, the easing of purchase restrictions in some cities “demonstrates some willingness to expand pockets of residential real estate investment.”
“The intent is unlikely to revive real estate to the point where it drives a domestic wealth effect. Rather, it is likely aimed at clearing the market from excess inventory in an effort to stop property prices from declining further,” Polan added.
It’s a tricky balance.
For decades, China’s growth has been driven by debt-fueled real estate investment. But now, Beijing has set its sights on the hot new industries of electric vehicles, solar cells, and lithium batteries for its economic future.
It has to somehow engineer that transition.
“China certainly has to kind of go through this growing pain of evolving this economy to something different than it was dependent upon for last couple decades,” said Harburg.
The danger: Messy and overzealous policy implementation
Even though China’s technocrats may move mountains to boost the country’s economy, it could get messy, said Nomura’s economists.
“Many of those measures might have a limited impact on stabilizing growth and solving real problems,” they wrote.
“Some of those policies might, at best, boost growth for only a short period of time while failing to clean up the mess in the property markets and address many of the structural issues including the fiscal predicament.”
It doesn’t help that Chinese officials have a history of overzealous policy implementation. Just look at the crackdowns on real estate, tech, and tutoring over the last few years.
China’s stock markets, which are dominated by retail investors fixated on social media, are blistering hot. On September 30, the mainland’s benchmark CSI 300 capped its best day since 2008 before a weeklong break. Now, there are fears that it could be running ahead of itself.
Since the PBOC’s initial announcement, Hong Kong’s Hang Seng Index has gained 30% while the mainland’s benchmark CSI 300 climbed 25%. China’s stock markets are closed for weeklong National Day public holidays and are set to reopen on Tuesday.
“Stimulus measures could add more fuel to the fire when stock markets are already heated. In fear of a repeat of 2015, Beijing may eventually become sufficiently concerned to reduce both monetary and fiscal stimulus measures and may even be forced to take actions to cool down the overheating,” warned economists at Nomura, referring to a stock market collapse in 2015.
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