Debt (Page 14)

President Xi Jinping claims to have “full trust in meeting this week’s economic growth target” and that China is continuing to play its part as the world’s largest financial growth engine.

International markets seem less certain, nevertheless. International investors were hardly interested in China’s Politburo’s striking new stimulus measures this week.

On Monday, Beijing surprised businesses with the biggest change in&nbsp, its economic position in 14 years. Xi’s coverage team is even pivoting to a “moderately free” squat from “prudent”, the first use of the terminology since the conflict of the 2008 global financial crisis.

The Politburo, the 24-member governing system led by Xi, has given the most explicit indication yet that it comprehends the enormity of the challenges affecting China.

With China’s home problems festering and private demand sweet, Beijing is bracing for Donald Trump’s inevitable trade war– and taking steps to getting ahead of the US president-elect’s affected tariffs.

According to economist Larry Hu at Macquarie Bank, Team Xi is “paving the means for a new financial easing period.” Given the slow private demand and the possibility of a new trade war, he adds,” suggests that policymakers are greatly concerned about the financial view.”

The shift to a “moderately free” fiscal policy, according to Bob Elliott, co-founder and CEO of Unlimited Funds, is “interessant to me– actually confirming the intensity and duration of the real estate economic crisis.”

It suggests, also, that more price breaks are coming. ” We do hope the People’s Bank of China to move up the pace of rate cuts following time”, says Julian Evans-Pritchard, head of China economy at Capital Economics.

Though “it’s improbable that they will cut costs anywhere near as violently” as politicians did during the Lehman Brothers problems 16 decades ago, he says, the need for more cash is clear.

More work must be done to have negative pressures, according to inflation information released on Tuesday. In November, consumer prices rose just 0.2 % year on year while dropping 0.6 % month on month, the biggest decline since March. Producer prices, meanwhile, fell for the 26th quarter in November, sliding 2.5 % year on year.

Exports fell, too, indicating that trigger efforts to date aren’t gaining the grip politicians hoped. In November, goods fell 3.9 % year-on-year.

According to economist Zhiwei Zhang of Pinpoint Asset Management,” the downturn of exports is consistent with the fragile consumer price data.” The Politburo conference provided a boost to domestic demand for the upcoming season. The market is eagerly awaiting information on what precisely the state will do.

More price reductions are both beneficial and likely. ” The People’s Bank of China has significant area to reduce the supply need ratio by at least 100 base positions in 2025″, says Carlos&nbsp, Casanova, scholar at Union Bancaire Privée.

Also, Casanova says, the PBOC may lessen the seven-day reverse mortgage rate by another 25 to 50 basis points.

He adds that “measures to increase interbank liquidity are likely to take precedence over outright rate cuts,” though. Given that M2 and credit growth are currently significantly below 2024 goals, coordinated efforts will be required to accelerate these metrics in 2025.

According to Becky Liu, a Standard Chartered Bank senior policy advisor for China, “delation pressures will continue in China,” especially as trade wars rekindle.

Brian Coulton, chief economist at Fitch Ratings, says that” for 2025 and 2026, we assume that US trade policy towards China&nbsp, will take a sharp protectionist turn”. Though there are “tentative signs of stabilization” in China’s real estate sector, it remains a clear and present danger to Asia’s biggest economy.

Wei He, economist at Gavekal Research, says that China’s growth momentum is therefore likely to remain relatively solid for the remainder&nbsp, of&nbsp, 2024 and into the new year. ” Still, the growth outlook for 2025 as a whole remains highly uncertain”, He notes. ” Some&nbsp, of&nbsp, the current supports for growth may not last”.

The front-loading&nbsp, of&nbsp, exports in anticipation&nbsp, of Trump’s tariffs will likely pull forward future demand.

” If and when higher US tariffs do arrive, exports will weaken and drag on overall economic growth”, He says. The property market’s nascent stability is still fragile and could deteriorate if government policies don’t make their mark. And since November’s stock market trading volumes have slowed, there may be a cooling in retail investor interest.

Yet for long-term government bond yields to fall much further, He adds, the PBOC would need to slash borrowing costs. ” The probability of large rate cuts is low, as lower rates would put more downward pressure on the currency even as the central&nbsp, bank&nbsp, appears likely to mount a defense&nbsp, of&nbsp, it”, He says. ” For the time being, the divergence between the bond market signals and actual economic conditions appears to be growing.”

This presents PBOC Governor Pan&nbsp, Gongsheng&nbsp, with quite a balancing act. So far, Pan has been reluctant to deploy the massive stimulus “bazooka” the PBOC did amid the 2008 global crisis.

Because Beijing is hesitant to reinflate bubbles or reward bad behavior in ways that reverse years of economic deleveraging. Additionally, it worries that property developers could default on offshore debt if the yuan falls.

China is loath, too, to provoke the Trump 2.0 White House with a weaker exchange rate. Trump might go even higher than 60 % in terms of tariffs on domestic goods, which would lessen the chances of a “grand bargain” trade agreement between Beijing and Washington.

The positive news is that China isn’t using the infrastructure apparatus it used to combat previous crises. Rather, Xi’s team and the PBOC are prioritizing increased consumer demand more directly than previously.

Xinhua news service quoted top officials as saying:” We must vigorously boost consumption, improve investment efficiency, and comprehensively expand domestic demand. We should pursue a more active fiscal and monetary policy in the coming year.

Trump’s upcoming trade war is also being aided by Xi’s Communist Party, which already has an arsenal of weapons to retaliate against the world’s largest economy.

Xi’s party launched a monopolistic behavior investigation into American Nvidia Corp. and prohibited the export of rare materials used for drones and other military applications in response to US President Joe Biden’s decision to restrict Chinese access to components for artificial intelligence chips.

Beijing’s plan to limit sales of key ingredients used to manufacture drones apply to Europe, too. China also announced this week that it is enforcing visa restrictions on some American officials who it believes are in charge of the affairs of Hong Kong.

China’s deflation dynamics aren’t all bad. Arguably, China is experiencing disinflation, not outright Japan-like deflation, and there are positives along with negatives to the phenomenon.

Chen Fengying, an ex-director of the China Institutes of Contemporary International Relations ‘ Institute of World Economic Studies, claims that this indicates that China’s economic transformation is progressing more quickly and that it is undergoing a digital economy and high-tech transformation.

Despite this, Team Xi seems determined to keep the average 5 % economic growth rate at the same level as it has been for the previous 16 years. According to Xi and Premier Li Qiang, any effort to create a more productive growth model must encourage dozens of local governments all over the country to abandon the debt-fueled infrastructure projects that are the product of previous boom-bust cycles.

The means by which local government politicians gained national respect over the past ten and a half years were generating above-trend gross domestic product ( GDP ) rates. This explains why China has too many low-vacancy skyscrapers, six-lane highways, international airports and hotels, white-elephant stadiums and ginormous apartment complexes that developers can’t complete.

This motivation partially accounts for why municipalities struggle with the burden of LGFV-related debt. Much of this borrowing is of the off-balance-sheet variety. At the start of 2024, the International Monetary Fund estimated that LGFV debt had risen to roughly&nbsp, 47.9 % of China’s GDP, or&nbsp, 60.2 trillion yuan ( US$ 8.3 trillion ).

If 2024 taught Beijing anything, it’s that certain laws of economic gravity still apply to nations transitioning from state-driven and export-led growth to services, innovation and domestic consumption.

According to one of those laws, developing economies must establish credible and reliable markets before influxes of billions of dollars from outside. Regulators also need to methodically improve transparency, encourage companies to play better governance, develop trustworthy surveillance systems like credit rating players, and strengthen the financial architecture before&nbsp, the&nbsp, world shows up.

On&nbsp, Xi’s watch, China has become less transparent and&nbsp, the&nbsp, media less free. And this is&nbsp, the&nbsp, problem facing Xiconomics: Too often China has believed it can build a world-class financial system&nbsp, after&nbsp, waves of foreign capital arrive.

Xi’s team is stepping up efforts to reverse this approach. However, the recent events in&nbsp mean Xi’s reform team is being watched as rarely as possible. With China’s$ 18 trillion economy facing turmoil in a variety of sectors, it’s vital for Xi’s technocrats to accelerate the work of building a stabler, more resilient financial system.

And for Beijing to lessen recent years ‘ erratic regulatory environment. Jack Ma, the founder of Alibaba Group, made a public appearance at an Ant Group event earlier this week.

It was his first since the company’s mammoth$ 37 billion initial public offering ( IPO ) got pulled in late 2020 amid Beijing’s crackdown on internet platforms. There, Ma said he expects “more miracles” from Chinese fintech companies and opportunities brought on by artificial intelligence.

The underlying economy matters, too. Global investors are paying close attention to whether the grand rhetoric from Xi and Li is translated into practical action. That’s particularly so for pledges to accelerate efforts to end&nbsp, the&nbsp, property crisis, stabilize local government finances and strengthen China’s capital markets.

Earlier this year, Xi’s team took a big swing for&nbsp, the&nbsp, future with plans to unleash “new productive forces” to create a more stable and productive economy. By providing targeted liquidity to troubled sectors, The PBOC has bolstered things.

Stock buying by&nbsp, the&nbsp, “national team” of state-run funds also helped stabilize things. For all China’s challenges, the CSI 300 Index is up nearly 20 % over the last 12 months.

But as Trump 2.0 arrives on January 20, 2025, Xi and Li have their work cut out to recalibrate growth engines and deleverage&nbsp, the&nbsp, economy while also ensuring Trump’s tariffs don’t slam top-line GDP rates. As global headwinds intensify, Beijing is under internal pressure to hit&nbsp, the&nbsp, gas anew&nbsp, on&nbsp, fiscal and monetary stimulus.

Recent data “are a clear sign of the fact that corporate willingness to invest has yet to be restored,” says former PBOC economist Sheng Songcheng, a professor at China Europe International Business School. We think there is still room for further RRR, or reserve requirement ratio, and interest rate cuts, given that the central bank continues to support a supportive monetary policy.

The biggest interest rate surprises may result from Beijing in the year to come in spite of the focus on the Federal Reserve in Washington and the Bank of Japan in Tokyo.

Follow William Pesek on X at @WilliamPesek

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