Any staffers at People’s Bank of China headquarters planning a vacation in the last two months of 2023 are almost surely hitting the “cancellation” button.
No major monetary authority is likely to be busier than Beijing’s between now and January 1 than the one Pan Gongsheng leads as governor. In the last 24 hours alone, the PBOC made headlines by, first, signaling a fresh liquidity surge to halt a jump in money market rates and then doing the opposite by draining about US$15 billion from money markets.
It dramatizes the ways in which the PBOC is caught between Federal Reserve rate hikes in Washington, Bank of Japan dovishness in Tokyo and credit market volatility everywhere else.
Add in China’s economic downshift, capital fleeing Shanghai and Shenzhen stocks, and enduring investor concerns about regulatory uncertainty in Beijing and it’s easy to see why holiday plans are likely being canceled at PBOC central.
Pan’s balancing act is made more precarious by the fact neither US Fed Chairman Jerome Powell nor BOJ Governor Kazuo Ueda knows where the next two-to-six months will take their respective monetary policies.
The US economy continues to surprise to the upside, growing at a barn-burning 4.9% annualized pace in the third quarter. Wages in Japan continue to underwhelm, taking BOJ tapering off the table.
The PBOC’s balancing act at home is getting dicier, too. At the same time, the yuan is under downward pressure, PBOC officials are trying to limit stimulus so that progress in reducing leverage and unproductive lending isn’t squandered. Yet there’s also a need to prop up a slumping economy and channel liquidity to troubled property developers.
Now, there’s an added test for Pan’s leadership team: President Xi Jinping’s new push to reduce debt risks plaguing local governments in order to increase economic dynamism around the nation.
At a twice-a-decade policy meeting of the Central Financial Work Conference this week, attended by Xi, officials unveiled plans for a long-term mechanism to clean up municipal balance sheets.
Naturally, it will fall to the PBOC to grease the skids via liquidity as local governments dispose of bad debts. The enterprise will echo the role the BOJ played in the early 2000s to facilitate the discarding of toxic loans undermining what was then Asia’s biggest economy.
Resolving local government debt troubles, made worse by an explosion of local government financing vehicles (LGFVs), is vital to stabilizing China’s $61 trillion financial sector at a time when China Inc is already grappling with cratering real estate markets.
The idea, argues state-run Xinhua News, is to “optimize the debt structure of central and local governments” to improve the quality of national growth.
“This phrase suggests the central government may take up more funding responsibilities and leverage up further while local governments de-leverage and de-risk by resolving implicit debt problems,” says economist Maggie Wei at Goldman Sachs.
Lan Wang, an analyst at Fitch Ratings, says that “moving to diffuse refinancing strains” among LGFVs “could provide some potential for capex expansion under selected local governments,” bolstering Chinese growth.
Overall, Wang says, “property fallout continues.” Fitch, she adds, “recently downgraded several of the largest surviving homebuilders that are still rated in the investment-grade categories, underscoring the lack of stabilization.”
The local government debt plan coincides with Premier Li Qiang’s efforts to repair the property sector. So far, authorities have resisted calls for giant public bailouts of the kind Beijing resorted to in the past. Yet there are signs Xi and Li are becoming more open to easing regulatory pressure on a sector that has previously generated as much as 30% of gross domestic product.
In recent days, Communist Party leaders “vowed to meet the reasonable financing needs from developers,” says economist Larry Hu at Macquarie Bank. But, he adds, “it’s noteworthy that the conference didn’t mention the mantra ‘housing is for living, not for speculation.’” In other words, he notes, “this time around, the focus is to keep regulatory pressure to prevent the emergence of new risks, instead of launching another de-risking campaign.”
Even so, the extreme interconnectivity between property markets and local government finances means this week’s policy shift could be a major one for China’s macro performance in 2024 and beyond.
In the view of Bloomberg Intelligence economist David Qu, this “could turn out to be a monumental event for the financial sector. A debt-laden property sector that’s threatening to rock the financial system adds urgency to the agenda.”
The same goes for the urgency at PBOC headquarters to keep the financial peace. Pan’s team has more work to do as rising US yields and elevated global inflation generate intensifying headwinds.
“China’s structural economic downturn will continue,” says Raymond Yeung, an economist at ANZ Bank. Recent “data improvement doesn’t represent a turnaround in fundamental challenges, such as worsening demographics, a lack of productivity improvement and trade tension.”
It helps that Xi and Li are boosting fiscal stimulus, albeit modestly. Last week, Beijing announced a 1 trillion yuan ($137 billion) sovereign debt package for construction projects and that the national budget deficit would be allowed to widen to the largest in three decades.
“Beijing’s rare budget expansion marks a critical step in reflation,” says Robin Xing, economist at Morgan Stanley. “We expect growth and inflation to improve but in a subpar fashion. More stimulus and reforms are likely needed and exiting deflation could be a two-year journey.”
Zhiwei Zhang, economist at Pinpoint Asset Management, says “I take this policy as another step in the right direction. China should make its fiscal policy more supportive, given the deflationary pressure in the economy. Part of the funds raised will be utilized next year, hence this helps to boost growth outlook beyond the fourth quarter.”
Jing Liu, an economist at HSBC, adds that “this should have a positive effect for growth, though the effect may be more backloaded into next year.” Yet, notes economist Arjen van Dijkhuizen at ABN Amro, China faces “fierce headwinds” from the property sector, related debt issues and the “global growth slowdown” and from “ongoing tensions” with the US, EU and the West in general.
These and other headwinds will increase the pressure at PBOC headquarters. One is how rising global energy prices affect inflation – and the risk of Chinese stagflation. Another: sluggish demand for mainland exports. In September, shipments to the US plunged 16.4% year on year.
What’s more, “measures of foreign orders point to a more substantial decline in foreign demand than what has been reflected in the customs data so far,” says Zichun Huang at Capital Economics. “And the lagged impact of higher interest rates is likely to dampen consumer spending in major export markets over the next few quarters.”
In late October, Xi reportedly visited the PBOC, a first since he became president in 2012. It spotlighted the key role Pan’s team is playing in supporting GDP growth and financial markets. Along with the PBOC, Xi and Vice Premier He Lifeng dropped by the State Administration of Foreign Exchange, which manages China’s $3 trillion of currency reserves.
Yet the PBOC faces an uphill struggle in the months ahead to overcome the myriad headwinds bearing down on China. Some are coming in from Washington, where the Fed is likely to hike rates again. Others are from Europe and Japan, where post-Covid-19 recoveries aren’t as robust as hoped.
“Whatever does emerge from Beijing over the coming months, it likely won’t be quick enough to make any meaningful difference to 2023,” says Robert Carnell, an economist at ING Bank. “At best, it should be viewed as a pain management tool for the transition to a less leveraged economy.”
The good news is that the pain management process is accelerating in ways that could put China on a firmer footing in 2024 and beyond. The bad news is that vacations are off at PBOC for the foreseeable future.
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