Moves (Page 92)

Many investors couldn’t help but suspect Premier Li Qiang had lost the plot when he declared that China will easily reach his government’s 5% economic growth target for 2023.

“From what we see this year, China’s economy shows a clear momentum of rebound and improvement,” Li told the audience on June 27 at the World Economic Forum’s annual meeting in the coastal Chinese city of Tianjin.

That’s news to economists at Bank of America, Goldman Sachs, JPMorgan, UBS and other investment banks scrambling to downgrade their earlier more optimistic forecasts for China’s 2023. 

Yet Li’s confidence raises a tantalizing question: what if global markets are completely wrong about where China is headed economically over the next six months?

Count former International Monetary Fund bigwig Zhu Min in the camp that believes that negativity about China’s prospects is overdone.

“There are a lot of expectations on the Chinese government to have more stimulus policies,” Zhu, who until recently was the IMF’s deputy managing director, told the Tianjin forum. “I don’t think this is real.”

Sure, China may face some fiscal constraints, Zhu admits. Beijing, he points out, “has very high debt already,” as evidenced by a record debt-to-GDP ratio. Local governments, meantime, are scrambling to repay debt to ensure the overhaul doesn’t imperil China’s US$55 trillion banking system.

And a $2 trillion section of China’s local bond market is under strain as issuers struggle to refinance maturing debt. In the fourth quarter of 2022, net financing for China’s local government financing vehicles, or LGFVs, turned negative for the first time since 2018.

Analyst Laura Li at S&P Global Ratings speaks for many when she warns “there may be more debt repayment crises or even public bond defaults” if Beijing isn’t careful.

Yet, as Zhu explains, it’s also the case that Asia’s biggest economy doesn’t need additional stimulus jolts to confound the skeptics. As such, Zhu expects a choosier, more deliberate and reform-minded approach that boosts consumption while also accelerating China’s transition toward high-tech sectors and more green growth.

The most likely policy approach, Zhu said, is ensuring that household incomes grow faster than GDP this year while building better social safety nets via improved health care and pension systems for the longer run.

“I understand there is a lot of fear,” Zhu, the former IMF official, said. “We need, really, to take the fear away, rebuild the confidence. This is the most important thing.”

If Li and Zhu are right, it’s clear Beijing is doing a poor job on communications. Yet their efforts to convince global investors and mainland households alike should be more about showing than telling. 

China, in other words, “is in need of a credible economic recovery plan to boost confidence” that it can “revive animal spirits before labor market conditions deteriorate further,” said strategist Fiona Lim at Maybank.

In a report to clients this week, Citibank analysts said it’s high time Beijing addressed the “weak confidence prevalent across households, corporates and investors in China.”

Here, Kelvin Wong, analyst at OANDA, noted that Li this week “stopped short of revealing any details on the highly anticipated new fiscal stimulus measures” that the State Council discussed two weeks ago.

But, Wong said, Li’s “confidence boosting” speech “triggered a broad-based rally in key China’s proxies benchmark stock indices that snapped five consecutive days of losses.”

It makes investors wonder, too. This could be overconfidence or mere spin by a newish premier under pressure to regain the macroeconomic narrative. It also could be a sign that worries about China’s second half will prove unwarranted.

As such, it remains unclear whether this week’s market gains can be sustained. “Without any clear indication of the scope and implementation timing of the new fiscal stimulus measures,” Wong said, uncertainty may “dampen the short-term bullish mood and trigger another bout of downside pressure in China and Asian ex-Japan equities in general.”

Li, though, claims the Communist Party is on top of all things economic.

“We will launch more practical and effective measures in expanding the potential of domestic demand, activating market vitality, promoting coordinated development, accelerating green transition, and promoting high-level opening to the outside world,” Li said.

At the same time, Li urged world powers to lower the temperature. Since Li’s recent visit to France and Germany, sharp rhetoric toward China from European governments has only heightened tensions.

“Everyone knows some people in the West are hyping up this so-called ‘de-risking,’ and I think, to some extent, it’s a false proposition,” Li said. He added that the “invisible barriers put up by some people in recent years are becoming widespread and pushing the world into fragmentation and even confrontation.”

The bottom line, Li said, is that “we firmly oppose the artificial politicization of economic and trade issues.”

Yet Li’s relative optimism — and Beijing’s lack of haste so far to crank up major stimulus—has economists wondering what his team knows that markets don’t. Does the conventional wisdom about massive new stimulus moves require revision?

“Economic growth in China is likely to reach 5% this year, which is in line with government targets and consensus forecasts,” says analyst Aaron Costello at Cambridge Analytics. 

“Following a stronger-than-expected first quarter, recent economic data has softened, disappointing investor expectations of a sharper recovery after last year’s Covid-19 lockdown, but the Chinese economy is not on the verge of relapsing into recession.”

That’s not to say Chinese officials are sleeping on the job. Economist Wei He at Gavekal Research noted that “officials have whirred into action to bolster the slowing economic recovery, cutting rates and pledging more support to come.”

Yet, he added, “constraints will lead them to target support to favored industries and probably dial up infrastructure investment. Those measures are likely to underwhelm. Investors should buy the rumor, sell the fact.”

Last week, President Xi Jinping’s Cabinet pledged to “take more effective measures to enhance the momentum of development, optimize the economic structure, and promote the sustained recovery of the economy” — and to do so “in a timely manner,” Wei noted.

In the meantime, odds are that the People’s Bank of China will continue to play the leading stimulus role. “Weak investments data suggest that authorities are unlikely to stop at the monetary easing we saw” last week, said economist Louise Loo at Oxford Economics.

Zhiwei Zhang, economist at Pinpoint Asset Management, added that “credit growth is weak, which is not surprising as other economic indicators such as purchasing managers’ indexes and exports also sent consistent signals. This explains why the PBOC cut the reverse repo rate … It is a small step in the right direction. I expect more policy actions to follow in coming weeks.”

Earlier this month, PBOC Governor Yi Gang said the central bank will enhance “counter-cyclical” policy adjustments to hasten growth in the real economy via policy tools that lower funding costs.”

In a note to clients, economists at Nomura wrote that “we believe these comments suggest that Beijing has now become seriously concerned over the potential for a double dip, and the PBOC may respond by stepping up stimulus measures in the near term.”

But, as Li’s team suggests, any government stimulus also will involve upgrades to China’s microeconomic structure. That includes moves to stabilize the fragile property market and alter incentives to reduce the risks of boom-bust cycles.

Lauren Gloudeman, analyst at Eurasia Group, observed that the National Development and Reform Commission, China’s economic planning body, indicated that “more effort will be spent on boosting auto sales, constructing charging facilities and renovating the grid for new energy vehicles.”

And “the supply side,” she added, “China’s financial regulators have pledged to provide more tax rebates and reduce transaction costs. In the property sector, Beijing is likely to take a differentiated approach across cities, including by significantly lifting administrative restrictions on home purchases and reducing associated costs such as down payment requirements to stimulate sales in cities with sluggish market conditions while maintaining restrictions elsewhere.”

In the upcoming weeks, Gloudeman said, these ministries are expected to develop specific policies that outline how to implement these ideas. 

Again, though, Beijing’s communication game needs work. It’s clear that Li’s team favors “more targeted support directed at weak spots, including real estate,” said economist Arjen van Dijkhuizen at ABN Amro.

What’s less clear, though, is that global investors trust that this more surgical approach to stimulus will get China to 5% GDP growth, as Li insists is in the offing. Perhaps Li is right. But it’s high time Beijing worked harder to convince international investor skeptics.

Follow William Pesek on Twitter at @WilliamPesek

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