President Xi Jinping is prodding China’s largest banks to slash rates on mortgages and deposits.
Yet here’s what’s most interesting about Beijing harnessing roughly US$5.3 trillion of mortgages, equivalent to the combined gross domestic product (GDP) of the UK and Italy: how little excitement the news generated in global markets.
One reason for the dearth of enthusiasm is that investors reckon China has way more yet to do to stabilize economic growth and contain its spiraling property crisis. The bigger question, though, is the extent to which Xi’s team is internalizing this message.
As Asia Times has reported extensively, Xi, Premier Li Qiang and the People’s Bank of China (PBOC) are determined to do more with less during this downswing. In past downturn cycles, including in 2008 and 2015, the response was of the “kitchen sink” variety: Beijing countered headwinds with overwhelming force to keep GDP growth north of 5% against all odds.
Fast forward to 2023, policy caution is winning the day. On the one hand, Xi’s team is reluctant to squander its success in recent years to reduce leverage across the economy. That includes the troubled property sector, which in the past would have been bailed out aggressively in the circumstances.
On the other, devaluing the yuan — an easy call amid past crises — could backfire this time. In doing so, Team Xi would set back progress in internationalizing the yuan’s use in trade and finance. A weaker yuan might make dollar-denominated debt harder to manage, increasing default risks. And it might cause a political riot in Washington as the 2024 US election cycle heats up.
That helps explain why Xi’s economic team is prodding banks to add liquidity around the margins rather than fire its stimulus bazooka again. By cutting rates on the nation’s 38.6 trillion yuan (US$5.3 trillion) of outstanding mortgages, Beijing is looking to support growth with less fanfare.
Yet Beijing is at risk of losing the perception battle.
Accurate or not, a narrative is taking hold that China’s growth “miracle” is over and that “Japanification” risks abound. It doesn’t make it so, but in these social media-driven meme-stock times, in which algorithmic trading trumps gut-feeling responses to global uncertainties, false narratives can take on a life of their own. And damaging ones can metastasize quicker than Xi’s inner circle may realize.
Along with unfavorable demographics, China confronts slipping exports, growing risks from the decoupling/derisking dynamics of recent years and persistent questions about China’s true innovative powers.
At the moment, “there is confusion and, as long as there is confusion, then there’s lack of credibility and that means investors are more likely to stay away,” says strategist Seema Shah at Principal Global Investors, a US-based capital market company. Because there is a lack of confidence, Shah argues, “the only way out is to step up fiscal stimulus.”
The ways in which Beijing’s 2020 clampdown on Jack Ma and fellow private tech firm founders backfired remains a cautionary tale. Beijing’s spin that scrapping a $37 billion initial public offering by Ma’s Ant Group was about “reform” fell flat with many global investors. Markets read it as the political empire striking back at billionaires who thought they had real power.
China has been in damage control mode ever since. In March, Xi handed the rebuild-investor-trust portfolio to new Premier Li. Since then, Li has taken pains to argue Beijing is stepping up efforts to normalize China’s regulatory environment. The goal, Li said, is to “reduce the costs of compliance and promote the healthy development of industry.”
Li added that “on the journey of building a modern socialist country, the platform economy has great potential” and that tech chieftains should “push to increase their international competitiveness and dare to compete on the global stage.”
Though such rhetoric checks many boxes, the recent bankruptcy of China Evergrande Group and default drama surrounding developer Country Garden has global investors on crisis watch. The question becomes: Have China’s property woes already been largely priced into the market? Or might additional bad developer news drive shares and the yuan even lower?
This is surely the scenario China is pushing on global investors. But what drowns out this message is China’s demographic trajectory as the population ages and waning export competitiveness dampens the longer-term outlook.
The fallout from US President Joe Biden’s China-focused trade policies is doing some serious damage to Asia’s biggest economy. This, too, runs afoul of conventional wisdom. It’s fair to say, though, that Biden’s meticulously targeted moves to limit Chinese access to vital technology are taking a toll.
To be sure, many will argue that Xi’s economic team is running circles around Biden’s. Yet it’s hard not to wonder if Biden’s tech curbs have been the equivalent of pouring sugar into China’s economic gas tank.
Whereas Donald Trump’s tariffs generated headlines, Biden’s death-by-a-thousand-cuts approach is slowly but surely slamming China’s export engine.
That’s dreadful news for the global economy. “China’s huge economy is the planetary body around which all others in Asia revolve,” says economist Vincent Tsui at Gavekal Dragonomics. “That dependency stems from trade linkages – whether as suppliers of raw materials or functioning in some complex supply chain – and from financial relationships through capital flows and currency markets. Hence, to borrow an old adage, when China sneezes, Asia catches a cold.”
The onus is on Beijing to convince markets it’s acting boldly enough to combat slowing growth and deflation. This means moving faster to strengthen capital markets, incentivize innovation, grow the size of the private sector and build bigger social safety nets to encourage consumption over savings.
In a recent note to clients weighing recent stock trading reforms, economists at Nomura Holdings said: “We believe these latest measures are in line with the directive from the July Politburo meeting, when the authorities pledged to invigorate China’s capital markets, but do not represent a meaningful increment in policy support for reviving the real economy.”
As such, explains Nomura chief China economist Ting Lu, “the measures over the past weekend are not enough to stem the downward spiral” and their impact will be short-lived if not followed by measures for supporting the real economy. “Without additional and more aggressive policy stimulus,” Lu says, “these stock-focused policies alone have little sustainable positive impact.”
In China, what’s needed more than stimulus is credible steps to build a more dynamic and resilient financial system. Along with short-term stimulus, policymakers must look past today’s uncertainty and implement bold and credible reforms, many analysts argue.
The worry, says professor Victor Shih at the University of California, San Diego, is that because Beijing’s policymakers “believe the financial system to be so fragile, they fear any shock could cause a crisis.” If “authorities are so afraid of any sign of instability,” Shih explains, prospects may dim for major upgrades.
The political will for change in Beijing is still unclear, says analyst Charlene Chu at Autonomous Research. The problem is that engineering the transition from state sector-driven growth to a private sector-innovation model is difficult because of how “it directly conflicts with the top-down manner in which the Communist Party typically manages the economy.”
For all the talk of Chinese contagion, global markets aren’t yet panicking. Economist Jay Bryson at Wells Fargo & Co argues that a “debt-induced economic downturn in China likely would not trigger another global financial crisis ala 2008.” That’s partly because the US, Europe and Japan, for all their challenges, are more stable than they were 15 years ago.
Economist Brad Setser at the Council on Foreign Relations adds that there “aren’t realistic channels for financial contagion” from the second-biggest economy to the US. As such, he sees “no real scenario” in which China “disrupts” American markets in ways the US Federal Reserve can’t handle.
Yet the depth of China’s GDP downshift is surprising to even many of the naysayers. And it’s exacerbating concerns about widening cracks in the financial system.
In recent days, Beijing stepped up scrutiny of Zhongrong International Trust’s books, sending markets buzzing about a state-led rescue of the notoriously opaque shadow banking system. Indeed, concern is growing about the health of China’s $2.9 trillion trust sector as the property slump deepens and GDP flatlines.
“Demand from key trading partners is diminishing. Both the US and Eurozone Manufacturing PMIs have fallen below the expansion threshold of 50 for nine and 14 consecutive months, respectively,” says economist Taimur Baig at DBS.
As a result, the PBOC’s balancing act might become more challenging over time. The central bank’s recent cuts “suggest that the authorities’ concern about the state of the macroeconomy is mounting,” says economist Robert Carnell at ING Bank. “But that doesn’t mean that they are about to undertake unorthodox policy measures.”
For now, at least. So far, new PBOC Governor Pan Gongsheng is putting financial retooling ahead of stimulus. For example, according to the state-run Securities Times, Pan’s team is devising new plans to give private businesses increased access to funding.
Ma Jianyang, deputy head of the PBOC’s financial market department, says it’s now a “clear goal” to increase private firms’ share of loans.
At the same time, financial news outlet Cailian reports that Beijing will increase support for private companies seeking to go public or execute secondary share offerings.
The Shanghai Stock Exchange, meantime, is working to streamline the IPO process, increase the efficiency of corporate acquisitions and facilitate restructuring efforts among tech companies.
China Inc isn’t without its bright spots at the moment. Shenzhen-based Huawei Technologies cheered mainland markets with a savvy new US$960 smartphone this week. It was the latest sign that China’s biggest companies are finding creative ways around US tech sanctions.
Though Chinese foreign direct investment is likely to decline through year-end, says analyst Karl Shen at Fitch Ratings, “FDI into the high-tech manufacturing sector is likely to stay more resilient.”
Shen notes that year-on-year declines in total FDI inflows accelerated to 9.8% in the first seven months of 2023 versus a 3.3% drop in the first four months. “We believe the Chinese government’s latest plan to further attract foreign investment is unlikely to produce a significantly positive effect in the short term,” Shen says.
But, he adds, “We expect high-tech manufacturing to remain a bright spot, supporting FDI inflows in the medium term. High-tech manufacturing FDI has continuously grown faster than total FDI and high-tech FDI since 2021 and remained resilient in 2023 – growing at 25.3% year-on-year” in the January-July period.
Overall, though, China faces growing market perceptions that its responses to domestic troubles and collateral damage from trade tensions are unequal to the challenge.
It doesn’t make it so. But Xi, Li and Pan would be wise to read the global room and signal that Beijing is well on top of things. At the moment, this message is getting lost in translation.
Follow William Pesek on X, formerly known as Twitter, at @WilliamPesek