Xi Jinping’s economic adrenaline shot only bought China for a while

First he took a sip of tea to gather his composure. China’s central bank Pan Gongsheng launched one of the country’s boldest policy campaigns in decades.

With an enormous amount of adrenaline pumping for an economy on the cusp of a deflationary spiral, the governor of the People’s Bank of China and other top financial officials unveiled some of the easing measures that market watchers had been expecting for weeks at a rare, high level. -level press conference in Beijing. These include interest rate cuts, more cash for banks, greater incentives to buy homes and plans to consider a stock stabilization fund.

Markets on the mainland and in Hong Kong rose, with the CSI 300 Index – a benchmark of mainland Chinese stocks – posting its biggest gain since July 2020. US equity futures advanced and European shares rose behind sectors with heavy exposure to China, including auto and goods manufacturing luxurious.

The market reaction to the policy blitz suggests that Pan, a technocrat who spent time at Harvard and Cambridge, has bought China’s economy some precious time. But economists believe this is just the down payment if President Xi Jinping is to pull the roughly $18 trillion economy out of a slump marked by a property market explosion, weak consumer prices and global trade tensions.

“I don’t think it’s enough to address the issues behind China’s move into a deflationary spiral,” said Duncan Wrigley, chief China economist with Pantheon Macroeconomics. What China needs, he added, is “a package of reforms to reconfigure the economy and unleash consumption growth.”

Tuesday’s briefing, hastily arranged just 48 hours earlier, followed weeks of growing anxiety among top leaders in Xi’s administration, according to people familiar with the situation. Senior policymakers are holding unscheduled closed-door meetings to discuss the economy, as it becomes increasingly clear that this year’s growth targets will not be met, the people added.

Of particular concern is a warning from officials in at least one major coastal province, a key contributor to growth, that it will struggle to meet gross domestic product targets, one of the people said. surprise for many officials, who have waited for months to hear advice about the policy proposals they have drawn up to revive the economy. Last week, he suddenly received requests for more information, forcing some to pull an all-nighter before Tuesday’s briefing, according to regulatory officials who asked not to be identified for personal matters.

The work seems to be paying off. Pan and other officials have changed the narrative about China’s economy today. Here’s a big change: In recent weeks, banks from Goldman Sachs Group Inc. to UBS Group AG cut its forecast on China’s economic growth after a slew of bad data fueled alarm over falling prices.

Bloomberg Economics and others now expect the government to meet Xi’s target of growing GDP by “about 5%” this year. But most economists also agree that more is needed to avoid Japan-style deflation. The big missing piece remains a coherent strategy to get China’s 1.4 billion people to increase their spending.

“A lot of China’s issues are demand- or confidence-driven,” said Nigel Peh, portfolio manager at Timefolio Asset Management Co. “Overall, I don’t think the move will move the needle because China’s problem is complex. And there is no silver bullet.

With the central bank surprising the market by doing more than expected, the spotlight is now on the Ministry of Finance. More fiscal measures are possible in the next few days as Xi’s 24-member Politburo is set to meet ahead of a week-long annual holiday from Tuesday. The event will mark the 75th anniversary since the Communist Party founded the People’s Republic of China.

Despite pressure from the US and elsewhere to stimulate consumption and balance the economy from manufacturing, leaders in Beijing prefer to avoid paying people. The handout is a public policy recipe for boosting demand in various countries, but China is worried about creating an unsustainable welfare state – and in a country with one of the world’s highest savings rates, officials doubt that most people will spend the money. any case.

Those who have the market pinning hope in more funding to buy up unsold houses, spending more for social welfare and more movement for consumers trade in old appliances. The Ministry of Finance can also encourage local governments to sell more bonds to increase infrastructure spending.

Debate is also emerging in China over whether to scrap the unwritten rule of keeping the fiscal deficit at or below 3% of GDP and keeping the debt-to-GDP ratio below 60%. The government should “raise” fiscal spending to pay for education, medical care and social security, according to Xu Qiyuan, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. The think tank is affiliated with the State Council, China’s equivalent of the US cabinet.

“While expansionary policies have side effects, the lesson we should learn from Japan is that the side effects will be worse if expansion policies are not implemented or delayed,” Xu said. “China should not be bound by the outdated fiscal doctrines of the US and Europe.”

Officials in Beijing want fiscal measures to boost confidence in the private sector. But Xi’s administration has taken steps in recent years that have done the opposite, including cracking down on tech giants like Alibaba Group Holding Ltd. and objected to the “hedonistic” lifestyle of financial workers.

At least three top investment bankers from different securities firms have been arrested in recent months, along with five current and former employees of British drugmaker AstraZeneca Plc. Concerns about executive safety, heightened US-China tensions and an economy plagued by a troubled property sector are keeping foreign investors away.

“It feels like we’re a long way from actually investing” in China’s property market, Hamish MacDonald, head and head of Asia-Pacific real estate investment at BlackRock Inc., said when asked about the impact of the stimulus.

“I want to see offshore capital focus on it, and I want to see domestic capital also buy,” he said. “Right now, there aren’t many buyers in either of those two categories.”

At Tuesday’s briefing, Pan and other officials remained firm on monetary policy. And there is no mention of “deflation,” a term that Chinese authorities are trying to censor.

Still, the fact that the PBOC governor held a live televised briefing to announce major monetary policy measures, provide some forward guidance and take questions from reporters represents a sea change in the way China operates.

Under past governors, the PBOC usually announced major monetary policy decisions in statements published on its website. Sometimes the accompanying release will provide some background information, attributed to an “unnamed official”.

For some investors, the transparency shown on Tuesday showed Beijing’s urgency to prevent a rout that has wiped more than $6 trillion from the value of Chinese and Hong Kong stock markets since the 2021 peak.

“What surprised the market was the clear direction and funding from the PBOC to be a strong liquidity resort to support the stock market,” said Linda Lam, head of equity advisory for North Asia at Union Bancaire Privee in Hong Kong.

“China’s capital markets should enjoy a sweet liquidity honeymoon period,” he added. “China is buying time to fix deeper growth problems.”