The World Bank isn’t buying China’s stimulus talk – Asia Times
To anyone who hopes 2025 will be a less terrible season for China’s economy, the World Bank has some bad news for you.
The international lender anticipates that Asia’s largest economy’s growth will decline also further next year, creating new headwinds for the region. This is in spite of Beijing’s current moves to boost economic growth in response to negative pressures and an initial global investor response that was at least initially passionate.
” Just signaled fiscal support may raise short-term progress, but longer-term development will depend on deeper structural measures”, the World Bank said on October 8. For three years, it said,” China’s expansion has spilled over advantageously to its companions, but the size of that motivation is today diminishing”.
The World Bank might be misinterpreting China’s efforts to resurrect its financial situation. It , cut borrowing costs, slashed businesses ‘ supply need numbers, reduced loan rates and unveiled market-support resources to put a floor under share costs. In Beijing, stronger macroeconomic stimulus measures are also being considered.
If the world’s house crisis is allowed to enhance, furthering negative forces, some economists worry about a lighter course. The uncertainty issue is demonstrated by the extreme volatility in Chinese shares over the past ten days.
When the World Bank mentions the need for “deeper architectural changes,” plunging house prices are at the top of their record. Yet , Chinese leader Xi Jinping appears to think period is on Beijing’s part in repairing the critical business. It might not be, as Japan has demonstrated over the years,  , some economists say.
China’s existing real estate troubles and Japan’s negative loan problems of the 1990s are n’t essentially analogous. The important resemblance is a critical driver of economic growth stalling out indefinitely, triggering bad knock-on implications in different industries.
In China’s situation, this likewise means municipal governments around the country. Provincial leaders have relied on area sales and tax revenues from sizable construction projects for many years.
” China’s boom-and-bust housing market is largely driven by local governments ‘ heavy reliance on expanding the real estate business to provide a major source of income”, said Tianlei Huang, an analyst at the Peterson Institute for International Economics, a Washington-based think tank.
Since 2022, Huang added,” the decline in the housing market has hurt native state funds and exposed a , prone system , in need of reform”.
It’s a portrait of what ails China. And still, Xi’s Communist Party continues to treat the signs of financial issues, not the underlying problems themselves. The longer they fester, the stronger the resulting headwinds.
Rather than the 4.8 % the World Bank sees China’s economy growing this year, it sees the nation expanding at just 4.3 % in 2025. Both readings are below Beijing’s current 5 % target.
Of course, for an economy at China’s level of development, 4.3 % is effectively recession territory. And if Xi’s team does n’t act boldly and expeditiously to revive growth, that figure could prove too optimistic.
One wildcard is the , November 5 , US election. The upcoming trade wars would disproportionately hit China if Donald Trump were to win.
During his first presidency from 2027 to 2021, Trump imposed harsh tariffs on China. Xi’s government has n’t seen anything yet if Trump comes back to power. Trump has already predicted a generalized global levy on all imports into the US and a 60 % tax on all Chinese goods.
” With higher US tariffs, a number of highly open economies in the Asia-Pacific are at risk of GDP falling below their baselines”, said Deborah Tan, an analyst at Moody’s Ratings. Along with China, they include Malaysia, Singapore, South Korea, Taiwan and Thailand.
According to Tan,” these are primarily economies with high participation in global value chains and high exposure to US and Chinese intermediate goods supply and final goods demand.”
Vietnam, for example, has a high export share of gross domestic product ( GDP ) with strong linkages with , Chinese manufacturing , supply chains. ” Our simulation shows that within Vietnam, the high-tech goods sector will take the largest hit to output”, Tan said. ” China, similarly, the high-tech goods sector takes the largest hit to output followed by the low-tech goods sector”.
As this threat percolates, Xi’s team in Beijing risks losing even more trust among global investors.
One thing is to discredit them on the stimulus front. The slower pace of fixing the housing sector, strengthening local government balance sheets, and establishing social safety nets so that households save less and spend more are the bigger issues.
However, these measures “do not replace the more thorough structural reforms that are required to promote longer-term growth,” according to World Bank economist Aaditya Mattoo. The majority of the measures and bond proceeds will carry over into the following fiscal year given the lead time for implementation of the policy.
Mattoo notes that “even then, consumers may be reluctant to splurge because a one-time transfer would not boost longer-term incomes or address concerns about aging, illness and unemployment”.
In the interim, billionaire Ray Dalio sees this as Xi’s party’s “do what it takes” to change the gloomy narrative that may be evoking global investor sentiment. Draghi’s 2012 declaration as head of the European Central Bank is referenced here.
Last week “was a big week” , , said Dalio, founder of Bridgewater Associates. ” In fact, I think that it was such a big week that , it could go down in the market-economic history books as comparable to the week Draghi said that he and the ECB would ‘ do whatever it takes,’ if China’s policymakers, in fact, do what it takes, which will require a lot more than what was announced”.
A long-time China bull, Dalio is increasingly vocal about his worries Beijing is sleepwalking into a , Japan-like funk , that history shows is challenging to exit. It’s taken Tokyo 25 years to begin exiting quantitative easing and its zero-interest-rate policies, and even that is proving challenging for the Bank of Japan.
To avoid it, one must devise a “beautiful deleveraging” strategy that balances printing enough yuan to support growth without causing inflation to rise too quickly while restructuring the entire economy. ” Doing these things starts to rekindle’ bottom fishing ‘ ]in stocks ] and ‘ animal spirits,'” he said. ” That is clearly happening right now,” he says.
Any new deleveraging efforts by Xi and Premier Li Qiang, Dalio said, will undoubtedly disorient and likely lead to more wealth destruction. That, it follows, will require considerable political courage, with Xi and Li having to decide where the costs and fallout of debt losses will be concentrated.
To Dalio, it all depends on “how well China’s domestic debt-money-economy challenges will be handled”.
At the same time, demographics are complicating the deleveraging process. The numerous moving parts that Xi and Li are struggling to manage are given a unique dimension by China’s aging population and shrinking working-age population.  ,
” While last week saw some amazing actions and words that I’m certain will be followed by highly stimulative policies that will greatly boost asset prices,” Dalio said.” I think there are several important other things to keep an eye on to see how well China’s domestic debt-money issues will be handled,”
That’s not to say there are n’t some reform wins that Xi and Li can tout. As Sherry Zhao, analyst at , Fitch Ratings, pointed out, refinancing risks for China’s local-government financing vehicles ( LGFVs ) have “reduced in the short term following government debt-relief measures and policy support, which will limit systemic risk”.
Provincial governments, Zhao said, continue to issue special refinancing bonds to swap “hidden debt”. The central government, meanwhile, has increased transfers to shoulder more infrastructure spending.
However, Zhao stressed,” we believe those support measures focus on the prevention of short-term , systemic risk rather than a full-scale bailout. There continue to be longer-term risks associated with , LGFVs ‘ debt burdens, and their resolution will hinge on China’s overall economic and fiscal strength”.
The Third Plenum meeting in July made it clear that local and regional governments may have more revenue flexibility to better accommodate their expenditure demands. ” The credit effects”, Zhao said,” will depend on how the changes are implemented, and on local governments ‘ willingness to use any additional revenue-raising powers given to them”.
The official Fitch view is that overall , LGFV , debt growth will be curbed as local governments tighten control of new debt, especially in regions that Beijing views as a priority for debt resolution.
The danger, however, is that these regions ‘ long-term debt default risk “remains and may even rise because of imbalances in economic and debt growth, as well as the potential inability of local governments to generate sustainable revenue for debt service.”
There are encouraging indications that China is currently developing a plan to stabilize the financial system and lessen risks.
Zheng Shanjie, the head of the National Development and Reform Commission, told reporters on October 8 that Beijing is developing” comprehensive policy measures to help stop the decline in the real estate market.” Shanjie said this in response to the National Development and Reform Commission’s announcement to stop housing sales and prices.
Zheng added that” we will take a number of potent and effective measures to try to boost the capital market in response to volatility and declines in the stock market.”
Even so, many economists and investors were disappointed that more short-term stimulus is n’t being deployed. ” Tuesday’s press briefing from China’s top economic planner … was supposed to be the big moment, the one where Beijing unleashed a , stimulus bazooka“, said economist Stephen Innes at SPI Asset Management. ” Instead, it was more of a pop gun”.
Innes added that” Beijing’s reluctance to roll out a bigger package is seriously questioned about the viability of this rally” in stocks.
James Sullivan, head of Asia-Pacific equity research at JPMorgan, told CNBC that” the million-dollar question in China right now is, does the stimulus only flow into the supply side of the equation, or does it ultimately flow through into consumer demand? That’s not our expectation right now”.
Follow William Pesek on X at @WilliamPesek