China’s slow response to economic turbulence leaves market bewildered: ‘Where do we go from here’ as policy changes remain elusive?
- As markets tank, investors and the Chinese public are pining for concrete actions and stimulus measures from Beijing that haven’t come
- Some analysts suggest that stock market fixes may not be as important as ensuring social stability, but worries are rising that shocks could force Beijing’s hand
Beijing’s response to what has been a worrisome raft of economic headwinds – including a widely watched stock market slump that has slammed investor confidence – highlights what analysts say is a failure to manage market expectations at a time when doing so is a critical step toward getting China’s economy back on solid footing.
To stem the tide of negative sentiment and ward off financial peril, observers warn that Chinese leadership is being hard-pressed to change tactics by employing substantial stimulus measures or more impactful policy reforms.
“There are lots of economic issues in China. But governments tend to react only after shocks have been generated.”
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“As far as the policy implications, [policymakers] are caught between a rock and a hard place,” said Stephen Innes, managing partner of SPI Asset Management in Bangkok.
A particular X factor, he said, is whether Donald Trump wins a second term as US president in November and heaps additional pressure on Chinese exports, as he did in his first term.
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“In response to the weakness, investors expected new stimulus to support the shaky economy,” said Harry Murphy Cruise, an economist with Moody’s Analytics, referring to hesitant household spending, a long bout of deflation, and a “retreat” in the property sector.
“That [stimulus] hasn’t come, and investors are now pulling funds to put into safer bets.”
Over the past few decades, China has relied on debt-fuelled infrastructure spending by local governments to achieve rapid economic growth, but analysts contend that such a development model is looking less sustainable.
“From 1994 to now, local government financial difficulties have become common, and the problem persists every year. The root cause lies in the boundary between the government and the markets,” Luo Zhiheng, chief macroeconomic analyst with the Yuekai Securities Research Institute, said last week at an event arranged by a Shanghai-based think tank, the China Chief Economist Forum. His comments were published to his personal blog on Tuesday.
“Therefore, for 2024, the fiscal balance and expenditure situation is far from straight forward, and it will still test the government’s financial-management capabilities” Luo said.
Luo added that authorities need to manage expectations more proactively, and that measures must be introduced “promptly and decisively”.
But he also acknowledged that Beijing’s fiscal measures may be “less than what the market expects”, despite its pro-growth stance.
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China’s gross domestic product (GDP) target for 2024, together with the fiscal deficit ratio, local bond quota and unemployment control target, will be officially approved and released in March at the annual gathering of the national legislature, the National People’s Congress.
Markets will closely watch the event to discern whether any strong measures will be taken, as China has struggled in its post-Covid recovery, with increasing economic volatility.
Some analysts expect that the fiscal deficit ratio – meaning total money spent in excess of income – will be set at 3.5-3.8 per cent of GDP, around the same as 2023’s.
Yu Yongding, former adviser to the People’s Bank of China, has said China needs to expand its fiscal and monetary policy amid the rising risks of low inflation, adding that China should consider lifting its fiscal deficit target to 4 or 5 per cent.
“Faced with a low-inflation environment that has lasted for more than 10 years, China must implement more expansionary fiscal and monetary policies, especially expansionary fiscal policies,” Yu said earlier this month in an interview with the China Finance 40 Forum, a Beijing-based think tank.
“Only in this way can China reverse the continued decline in economic growth and low market confidence.”
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Government officials have let stock markets go so far because they are focused more on the macroeconomy, said Song Seng Wun, an economic adviser at CGS-CIMB Securities in Singapore.
Tweaks to the markets would help relatively few people compared with economic reforms that create jobs and save entire companies, Song said.
“The bottom line is social stability,” he said, suggesting that China’s leaders agree on this priority. “When you look at it from a bigger, broader perspective of economic policy, [stock market fixes] may not be as important.”
And Innes at SPI Asset Management said other patchwork measures, such as the lowering of interest rates and adding of liquidity, also might not help.
“It’s just a vicious circle,” he said. “Where do we go from here?”
