Chinaâs bazooka stimulus days are done and gone
A great deal is riding on Li Qiang’s visit to Jakarta this week, the new Chinese premier’s first official stop in Southeast Asia.
For all the disappointment that Chinese leader Xi Jinping and US President Joe Biden won’t be at the Association of Southeast Asian Nations summit, Li is the one from which ASEAN leaders most want to hear.
In March, Xi entrusted Li to revive flagging mainland growth and restart big-picture reform efforts.
How Li characterizes Beijing’s plans for the world’s second-biggest economy means more for developing Asia than the West, given the ASEAN region’s extreme vulnerability to weakening Chinese growth. That’s especially true as China resists firing its stimulus “bazooka” during this latest downturn.
Since January, ASEAN has found itself grappling with two big misconceptions about China’s 2023. One, that the end of Covid-19 lockdowns would generate explosive growth and lift global demand. Two, that China would ramp up stimulus quickly and with overwhelming force amid signs the economy was struggling instead.
China’s slide toward deflation confounded the first assumption. Beijing’s surprisingly laid-back approach to cratering growth also caught developing Asia by surprise.
Li’s biggest challenge in Jakarta is reassuring ASEAN leaders that (a) rumors of a Chinese financial crisis are greatly exaggerated and (b) the region’s prospects have more to gain from allying with China than Biden’s America.
That’s become a bigger challenge as Beijing holds its fire on stimulus, dimming hopes the economy might hit its 5% economic growth target. Nor did the moves of recent days reassure ASEAN that China might fire its bazooka.
On September 1, for example, China moved to support its shaky property sector by cutting minimum down payments for mortgages to 20% for first-time buyers and 30% for second-time buyers nationwide.
The People’s Bank of China also cut the reserve requirement ratio on foreign exchange deposits, unleashing US$16 billion of liquidity to support a yuan that’s fallen 5% in four months.
The step came after regulators slashed margin requirements and stamp duties for equity transactions to “invigorate the capital market and boost investor confidence.”
All this sparked hopes Beijing was getting serious about rescuing its beleaguered property and financial sectors. Yet these are relatively modest tweaks that are unlikely to alter the downward trajectory of Asia’s biggest economy.
A sustained rally in Chinese stocks and revival in economists’ perceptions is “unlikely without more aggressive action to stabilize the ailing property sector and lift aggregate demand,” says economist Charles Gave at Gavekal Dragonomics.
Of course, the urgency is rising. Last week, for example, saw Guangzhou become the first “tier one” city to cut down payments and loan rates for many home purchases. Other cities followed Guangzhou’s lead, including Beijing and Shanghai, which loosened local property market restrictions late.
“But there remains little prospect of big-bang stimulus at the national level,” Gave says. “As a result, aggregate demand will continue to be subdued and growth weak.”
China’s downshift, Gave adds, “will have differing effects on different economies around the world. In Asia, manufacturing exporters partially dependent on Chinese final demand, such as Taiwan, will take a hit, although the pain will be mitigated by a nascent upturn in the electronics cycle.”
The US, he adds, “with little macro exposure to Chinese demand, will be relatively insulated. But Europe will suffer the twin blows of reduced Chinese demand for its exports, together with heightened Chinese competition against its manufacturers because of the soft renminbi.”
To be sure, Li has solid arguments to make that China isn’t unraveling in the ways Western media and commentators suggest. Xi and Li have ample latitude and enough levers to prop up growth if and when they choose.
The recent successes by Huawei Technologies and Semiconductor Manufacturing International Corp (SMIC) demonstrate how China Inc is navigating around US sanctions in nimble and creative ways.
The chip breakthrough buttressed the argument that the Sino-US trade war isn’t slowing China’s ambitions to move upmarket.
It helps, too, that for all the asset bubbles afflicting the Chinese economy, no specific tract of land has ever been worth as much as California as Tokyo’s Imperial Palace was in Japan’s frothy 1980s.
Still, Xi and Li are determined to balance the short-term desire to boost growth with the longer-term imperative of recalibrating growth engines. However, this is causing consternation across Asian economies that were betting on a post-Covid Chinese growth surge.
In recent months, global markets have ricocheted between excitement over a Chinese stimulus boom and disappointment over Beijing taking its sweet time to jolt a slowing economy.
Xi and Li have settled on a strategy somewhere in between by breaking the economy’s fall without giving too much support that would incentivize bad corporate behavior.
Under the surface, there are myriad hints that Li’s arrival in March put economic reforms on the front burner. In other words, Beijing now cares more about avoiding boom-bust cycles going forward than mindlessly generating new imbalances in 2023.
This anti-Mario Draghi moment has taken ASEAN by surprise. In 2012, the then-president of the European Central Bank made his infamous pledge that he’s “ready to do whatever it takes” to stabilize the financial system via powerful monetary easing.
On Draghi’s watch, the ECB unleashed stimulus on a level that would’ve been unfathomable to Bundesbank officials of old. His aggressiveness inspired other central bankers to follow suit, including then-Bank of Japan Governor Haruhiko Kuroda.
In Tokyo, between 2013 and 2018, the Kuroda-led BOJ’s balance sheet swelled to the point where it topped the size of Japan’s $5 trillion economy.
In both cases, a monetary boom did little, if anything, to make the broader European or Japanese economies more competitive, productive or, broadly speaking, more prosperous. Instead, rich monetary support generated a bubble in complacency.
Excessive monetary easing in Europe, Japan and elsewhere took the onus off government officials to loosen labor markets, reduce bureaucracy, incentivize innovation, tighten corporate governance or invest big in strengthening human capital.
China, it seems, is determined to go the other way. In the months since Xi started his third term — and Li arrived on the scene as his No 2 — Beijing has confounded the conventional wisdom on Chinese stimulus even as clear economic headwinds persist.
The closely-watched purchasing managers’ index (PMI) survey showed worse-than-expected non-manufacturing activity in August. A Caixin survey showed China’s service sector last month expanded at its slowest pace in eight months.
“As market competition was still tight, there was limited room for service companies to raise prices for customers, with the gauge for prices charged recording the lowest level in four months,” says economist Wang Zhe at Caixin Insight Group.
The services PMI suggests “activity in other services industries such as property may have deteriorated further in August,” Goldman Sachs wrote in a note.
One key market worry, says Goldman strategist Danny Suwanapruti, “is whether a weaker Chinese yuan will spur significant capital outflows. However, FX reserves are high, commercial banks’ external assets have been built up and the PBOC has tightened capital outflow channels.”
For now, says analyst Michael Hewson at CMC Markets, the outperformance of the dollar “is coming against a backdrop of rising optimism about the prospects for the US economy.” That, in turn, has markets wondering how a weaker yuan might affect global markets.
Former top International Monetary Fund official Josh Lipsky notes that the fallout from China’s slowdown “can’t just be wished away” and further weakness will “change some of the fundamentals of how the global economy has been wired over the past several decades.”
Jyotivardhan Jaipuria, founder of Valentis Advisors, believes that “China is perceptibly slowing down and that will have a secular slowdown in growth because they probably overbuilt the infrastructure.”
Now, he says, Beijing will “have to go through a phase where that whole overbuilt infrastructure which drove all the GDP growth for the last many years is going to start hurting them.”
The property sector also remains a considerable concern.
Troubles at Country Garden, China’s largest private property developer, are reminding markets that default risks abound. Recent days brought news that the company reported a record half-year loss of 48.9 billion yuan ($6.75 billion) for the first six months of 2023.
The resulting capital outflows have Li’s team unveiling fresh moves to boost personal income tax deductions for childcare, parental care and education. Additional steps to build a better social safety net that encourages consumption over savings are vitally needed.
“Policy momentum is clearly picking up,” says Citigroup analyst Yu Xiangrong. “This macro backdrop could be more supportive for China assets.”
Economist Hao Hong at Grow Investment Group adds that “economic fundamentals, as reflected in the cyclical asset prices, have so far failed to respond to policies as they used to. More needs to be done and will be.”
Yet things are only picking up so much as Beijing avoids another Draghi-like stimulus boom that will just add to China’s long-term troubles and squander recent progress made in deleveraging the economy.
It’s up to Li to explain to ASEAN officials – and global markets – why things are different this time in China. The more directly and transparently he does it, the better it will go over with China’s neighbors and the wider world economy.
Follow William Pesek on X, formerly known as Twitter, at @WilliamPesek
