Smart money’s looking beyond China stimulus debate – Asia Times
Businesses are resonating as a result of tension between President Xi Jinping’s long-term policy objectives and investor demand for short-term signal as Chinese securities recover.
The fight between the long and short viewpoints is not novel. For years, the” Washington Consensus” group has advised Beijing to adjust its unstable economy, which free market activists see as very reliant on giant, opaque state-owned companies and the vast incentives that sustain them.
However, restless investors who appear increasingly unwilling to give Beijing the room it needs to re-enter and overhaul its US$ 17 trillion market have frequently clashed with Xi’s work to do just that.
Until then, apparently. The conflict between Team Xi and anxious industry was clearly visible over the weekend.
Unplanned press conference by Xi’s Ministry of Finance ( MOF ) on Saturday ( 12 October ) sparked a frenzy with markets anticipating a potential significant new stimulus boost to help China reach its 20 % economic growth target for 2024 and new measures to combat the country’s increasingly ingrained deflation.
Futures markets sagged when MOF focused on larger transformation designs and declined to provide a certain amount label on the hung signal. But by Monday, companies rose.
Investors came to the conclusion that the MOF’s most recent statements reflect the pragmatism markets have long-craved from Xi’s inner circle, even if Beijing is n’t using its massive stimulus “bazooka.”
The trip news, according to economist Harry Murphy Cruise at Moody’s Analytics, “tied most of the appropriate boxes, but it lacked information on the size and range of new spending,” noting that” we anticipate more supports to be announced through the remainder of the year.”
Economist Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, says,” these policies are in the right direction”.
There is still a strong argument that Chinese stock valuations are now fairly valued despite the recent rally, which was buoyant from the US$ 6.5 trillion rout dating back to 2021. In addition, Chinese shares are currently trading at significantly lower multiples than those in the US, where new market highs are being made daily.
The MOF press conference was still a surprise to us, according to economist Jing Liu from HSBC Holdings, despite the lack of significant fiscal stimulus. ” The policy pivot looks very much here to stay, with the rising risk appetite having a significant impact on both the stock and property markets.”
Odds are, though, that this is a trust-but-verify moment for markets. Bullish investors are partially reacting to Beijing’s hints of further support for the troubled housing market and highly indebted local governments with new, targeted fiscal-spending jolts.
More and more stimulus is becoming more popular. In September, Chinese exports and imports came in weaker than expected, raising new doubts about the economy’s main bright spot. Overseas shipments, for example, rose just 2.4 % year on year, a sharp fall from August’s 8.7 % increase.
According to Capital Economics ‘ economist Zichun Huang, “further ahead… growing trade barriers are likely to become an increasing constraint” on export and economic growth.
Although the move from Washington to Seoul may cause more demand to be made in some of China’s key trading partners, according to economists, political restrictions on products like electric cars and other green technologies are causing new headwinds.
However, punters are beginning to realize that Xi’s inner circle is almost blatantly focused on bringing China into the so-called Fourth Industrial Revolution by accelerating the transition from the high-end to highly-value technology-driven industries.
Team Xi is more interested in the long-term benefits of tech-driven economic reinvention and future dominance of the industries. Although annual growth targets matter in the short run.
Investors are digging deeper into Chinese stock valuations in comparison to other top global markets and recognizing new value as a result of these caveats.
In the most recent Global Risk-Reward Monitor newsletter, Asia Times business editor David Goldman argues that with a price-earnings ( P/E ) ratio of 11, China’s stock market “is a bit too low”.
But at the same time, he notes,” there is no reason to expect Chinese valuations to approach the S&, P ( 500’s ) valuation of 22 times ( forward ) earnings”.
One reason, he argues, is that China’s government has gone out of its way to prevent and reverse the formation of market-skewing tech monopolies like Google, Microsoft or Amazon.
” No surprise, then, that Alibaba trades at a P/E of 27 after the run-up of the past month, versus Amazon’s 43″, Goldman writes. We have long argued that given subdued but consistent economic growth, China’s equity market valuation was too low. The Chinese market’s valuation seems more reasonable than that of the United States after the rally last month.
That’s not to say Beijing is n’t cognizant of the moment’s sensitivity. In a note to clients, economists at Morgan Stanley say this moment represents” Beijing’s second chance to convince the market” after a rough several days.
However, Xi may have found the balance between acting as a facilitator and a facilitator while also showing restraint.
According to Hui Shan, an economist at Goldman Sachs,” the most recent round of China stimulus clearly indicates that policymakers have turned to cyclical policy management and increased their focus on the economy.”
China will increase by 4.9 % this year, according to the US investment bank, up from an earlier forecast of 4.7 %. For 2025, Goldman Sachs sees growth of 4.7 %, up from an earlier 4.3 % forecast.
One source of Goldman Sachs ‘ optimism: MOF officials plan to deploy 2.3 trillion yuan ($ 325 billion ) of special local government bond funds in the fourth quarter of this year.
This, Hui says, suggests a more “back-loaded” public spending plan, paving the way for a bigger rebound than his bank had previously expected.
Last week, China ‘s , National Development and Reform Commission announced pre-approval of , 200 billion yuan , ($ 28.2 billion ) worth of 2025 investment projects. It is seen by Huawei’s team as a clear government effort to help China meet its 5 % GDP goal this year.
Carlos , Casanova, economist at Union Bancaire Privée, notes that investors are taking solace in Finance Minister Lan Fo’an highlighting that officials have a “fairly large” capacity to increase spending if needed.
That includes “implementing some of the most ambitious measures in years aimed at revitalizing the struggling property market, recapitalizing large banks,” according to Casanova, “everyone of which is crucial for addressing China’s ongoing structural challenges.”
However, Casanova adds,” the timeline for fiscal measures remains uncertain. The upcoming National People’s Congress Standing Committee meeting, scheduled for late October or early November, may require significant announcements to wait until.
The MOF “has given as strong a signal as possible while waiting for the NPC approval,” according to economist Shirley Ze Yu of the London School of Economics.
Larry Hu, Macquarie Capital’s chief China economist, doubts that Xi’s policymakers will be too specific about dollar amounts.
” First, they do n’t need to come up with such a number for the NPC to approve”, Hu says. ” Second, it’s hard to come up with such a number, as the line between fiscal, monetary and industrial policies is often blurred in China”.
Hu adds that, given the global financial crisis, it would go against Xi’s deleveraging goals of supplying the economy with stimulus the way Beijing did in 2008 and 2009.
Investors will be keenly focused on Beijing’s implementation of structural reforms, according to Hui of Goldman Sachs.  ,
” The’ 3D ‘ challenges – deteriorating demographics, a multi-year debt deleveraging trend and the global supply chain de-risking push — are unlikely to be reversed by the latest round of policy easing”, Hui argues.
However, Oxford University’s China Center economist George Magnus is concerned that Beijing may continue to implement outdated policies.
” A solution would involve the sustainable expansion of the income and consumer demand shares of the economy, an end to deflation risk, more income redistribution, the promotion of private enterprise, and extensive tax and local government reforms”, Magnus writes in an op-ed for The Guardian.
Magnus adds that” Xi’s more Leninist agenda emphasizes supply and production, and what he calls’ high-quality development,’ which is essentially about state- and party-led industrial policies to allocate capital to lead and dominate modern science, technology and innovation in the global system”.
” China already has and wants to expand advanced industrial expertise and leadership in some key firms and sectors,” according to Magnus. These technologically dominant islands are found in a sea of macroeconomic imbalances and issues that can only be actually addressed by more liberal and open economic reforms.
Bottom line: According to Magnus,” the current focus on economic policy is important not for some decimal points on GDP but as a signal whether the government can, or wants to grasp the nettle.”
Magnus is not the only one who is concerned that policy tinkering wo n’t be sufficient. China will become a more dynamic and competitive economy over the long term if only the government sector is reforming, the capital markets are deepened, and households are encouraged to save less and spend more.
On the other hand, half measures will likely leave China vulnerable to boom/bust cycles brought on by the imbalanced allocation of resources, weak debt, and misalignments between household income and spending.
Investors will want to bereassured that big-picture reforms are on the horizon with the upcoming NPC. For now, though, an increasing number of investors are already getting the memo on China’s grand plan.
Follow William Pesek on X at @WilliamPesek
