Allison Hooker, AGS Senior Vice President
Summary
In recent weeks, China’s senior financial officials have announced steps aimed at jumpstarting growth and addressing the problems that continue to plague the world’s second largest economy – its imploding real estate sector and slowing long-term growth. In late September, officials announced plans to lower interest and mortgage rates, resulting in a brief spike in markets which quickly fizzled as analysts wanted to see more substance from the plan. On October 12, the Ministry of Finance announced additional moves, noting plans for fiscal stimulus, though not specifying how much, leaving analysts and markets underwhelmed. More details are expected later this month when the National People’s Congress Standing Committee (NPCSC) is set to review proposed legislation. However, most analysts remain skeptical, as economists assess that to spur the kind of consumption required to kickstart growth, Beijing will need to spend up to 7% of GDP, or 10 trillion yuan (1.42 trillion USD).
China’s Seeks to Diversify its Economic Model by Deemphasizing the Property Market
China continues to grapple with significant economic challenges as it seeks to modernize and diversify its industrial weight and move away from the heavily property driven economic model which sustained China’s rapid economic growth for decades.
However, over the last few years, economic planners have failed to establish a viable long-term alternative for the real property and infrastructure construction markets. This transition period is proving to be difficult for China, which at one point depended on real estate activities such as purchasing, developing, and selling property for about one-third of the country’s total annual output.
Both domestic and international observers have long recognized the risks of this model, especially since it was built on unrealistically cheap credit and overly optimistic sentiment. Xi Jinping was the first leader to take bold action in 2020 by cracking down on excessive mortgage lending and allowing property developers to go bankrupt.
As a result of Xi’s moves, the property market experienced a significant correction as prices have dropped roughly 10%in inflation-adjusted terms over the past four years. While it is now functioning more normally, with prices stabilizing in coast urban areas but continuing to fall elsewhere, the property market correction proved so effective that the government fears losing control and resulting in a continued downward spiral of property values.
Economists suggest that China needs to transition to greater reliance on domestic consumption and producing goods and services.
Beijing Is Aggressively Intervening to Boost Growth
In late September, the Chinese government unveiled its most substantial effort in years to boost sluggish growth. Beijing announced new stabilization measures such as easing mortgage lending restrictions, reducing interest rates, creating a subsidy program for local governments to buy unsold properties for social housing, and freeing up around a trillion yuan ($140 billion) of new lending capacity at banks. These measures were seen as a move in the right direction that could begin to stabilize the property market, but the lack of concrete next steps left many wondering how China could sustain this artificial growth.
Calls for New Economic Stimulus
Calls for stimulus are becoming more prominent, including one trillion to two trillion yuan in transfer payments directly to households, either as a one-time handout or through the development of a permanent welfare state. This approach aims to create a virtuous cycle of rising household consumption and business investment to meet new domestic demand. In theory, this boost could address a long-standing challenge in China’s economy.
In order to fund this transfer spending, Beijing could issue government bonds to finance the stimulus payments. However, this could prove challenging as foreigners are less likely to buy Chinese government backed bonds due to rising geopolitical tensions, deteriorating economic prospects, and Beijing’s tendency to intervene in bond markets to suppress prices. Instead, Beijing could rely on domestic Chinese banks, insurers, and pension funds to purchase the debt as they are flush with house savings. This method could also address the perpetual issue of household cash hording which has held Chinese lenders back for decades and stymied productivity and business growth in China by limiting the amount of cash available for investment.
Importantly, the political controls on the economy that created China’s current economic woes are not likely to fundamentally change under Xi Jinping’s leadership. As a result, underling issues such as the low investment productivity of household savings are unlikely to be broken with a new stimulus approach.
Chinese Markets React with Volatility as New Measures are Announced
Following the late September stimulus announcements, Chinese stock markets surged, the Shanghai Composite Index closed up by 4.59 percent, the Shenzhen Component Index closed up by 9.17 percent, and the ChiNext Index closed up by 17.25 percent on October 9. But this upward trend quickly fizzled as follow-on briefings did not announce any new stimulus packages from the government an offered few details on policy.
On October 12, the Ministry of Finance announced four “countercyclical” fiscal measures aimed at boosting growth, including a one-time, large-scale expansion of a debt swap program that will allow local governments to issue special bonds to replace implicit debts; government sale of more sovereign debt to recapitalize banks; and a pledge to increase support for low-income citizens and students to try to spark consumption. Finance Ministry officials also stated additional fiscal stimulus moves would be forthcoming, though officials noted no concrete figures. Market reaction has been underwhelming, reflecting disappointment at the lack of details on the size of the stimulus. However, further clues about where China’s fiscal policy may be headed may come later this month, at the National People’s Congress Standing Committee meeting. Unlike monetary policies, expanding fiscal measures like issuance of government bonds and special bonds, requires approval from the National People’s Congress. Policymakers may be holding off on announcing additional details until the NPCSC reviews and rules on the legislation. However, analysts remain skeptical that Beijing’s moves will be sufficient to jumpstart the economy as experts assess that it will require upwards of 7% of GDP, or 10trillion yuan (1.42 trillion USD) to get consumption going again.
AGS will continue to monitor PRC related security and economic developments and provide relevant updates.
To stay up to date on what AGS is doing, follow us on LinkedIn