It is legitimate to ask whether China is blowing smoke in our eyes or dragging its feet on a debt-deflation crisis that Xi Jinping still refuses to acknowledge.
The raft of stimulus measures announced with escalating fanfare all through last week add up to a substantial short-term package, but the headline figures conflate notional credit with real money, and pack less of a macroeconomic punch than many think.
It is more about mood than structure, and is in part aimed at flattering the image of the Communist Party in time for the 75th anniversary of the People’s Republic.
“Relying solely on central bank measures has boosted morale, the stock market has gone up, but how long can this be sustained?” said Yu Yongding, a former-rate setter and the Oxford-educated director of the Chinese Academy of Social Sciences.
Fiscal expansion is the critical missing element. “The ball is in the ministry of finance’s court, but what exactly is the ministry planning to do?” he said at the Tsinghua PBC forum over the weekend.
The only big bazooka fired so far is for the stock market. Personally, I am delighted that the central bank is hurling money at equities for propaganda purposes. I have bets on the Shanghai casino. China ETFs make up the biggest chunk of my piggy bank portfolio precisely because Chinese equities were, until three weeks ago, deemed uninvestable and because it was a racing certainty that the Communist Party would have to do something about this indignity. And it has.
“Monks, disabled, old and sick are all flocking to open trading accounts. Brokers are completely overwhelmed. No one wanna miss out on this epic rally,” tweeted Hao Hong from the Shanghai hedge fund GROW.
But China’s stock market – if you can call it such a thing – is decoupled from the Chinese economy. It is chiefly driven by political messaging. It is literally financial window dressing.
Nothing has changed in the fundamental strategy of the Party. It has not yielded to pressure from the world – or from its own reformers – to rebalance the economy by switching from galactic, state-led investment to promoting consumption and a modern welfare net. It is tinkering at the edges.
Xi Jinping will not reform an economic structure that forces up the national savings rate to 43pc. He will not correct the greatest destabilising factor in the global economy today, which is that China produces 31pc of total manufactures but generates just 13pc of total consumption. He will not make his country compatible with an open trading system.
There was much attention on comments by the Politburo late last week that it would “stop the property market from falling” and “ensure necessary fiscal expenditure”. Less noticed was that it dropped earlier calls for more consumption and instead called for “maximising the role of government investment”, which is exactly what has led to the current impasse.
It confirmed that Xi will not retreat from the economic path unveiled in July at the Third Plenum. The Party still plans to double down on state-led investment across the gamut of industry, from green tech to chips, cars, aerospace and steel, creating further over-capacity that will push China deeper into deflation and hit the world with a China shock 2.0.
Chinese equity boomlets are engineered by the state when required to lift animal spirits and are stopped by the state once they get out of hand. They typically last around two months. This one may have more staying power because it comes with jumbo rate cuts by the US Federal Reserve and a monetary easing cycle across the world.
The People’s Bank (PBOC) is going further than before. It is opening a swap facility for brokers and insurers, letting them borrow against collateral provided that they use the money to buy stocks. It is creating a lending window at sub-market rates to promote share buybacks – the same practice that France may soon prohibit.
Governor Pan Gongsheng pledged to triple buyback funding if need be. The state could hardly be clearer that it wants everybody to buy stocks, and the more leverage, the better. “The fact that the government is doing this means other funds will start getting into the market too, and create a positive feedback loop as opposed to the vicious cycle we’ve been in,” said Bill Bishop from the China Sinocism newsletter.
“Shares could have a pop for a while but the risk is what we saw coming out of Covid. There was quite a rally for a couple of months but then people realised that the economic policies hadn’t changed,” he said.
The hot debate in China is whether this will repeat the roaring bull market in mid-2014, which led to a 130pc rise in the Shanghai composite over the next eight months. I doubt it. A decade ago the authorities were able to fire up a construction bubble that kept economic growth artificially high until it burst in 2021, causing estimated paper losses of some $18 trillion (£13.5 trillion), with negative wealth effects to match.
The Party cannot blow another such bubble because a glut of excess supply hangs over the market and the population is contracting by 2m a year. Nor do they wish to do so. “They don’t want to flip the real estate market back to the speculative craze that it used to be: they just want to stop it going down,” said Bishop.
Monetary policy is largely paralysed at this point because credit demand has died. The PBOC is pushing on a string. Rate cuts may help 50m households with flexible mortgages but they hurt others. Total mortgage debt in China is $5.4 trillion and total bank deposits are $41 trillion. Either banks take a hit on net interest margins, or savers take a hit on interest income.
It is the fiscal bazooka that really matters in a balance sheet recession and this has yet to to be confirmed. Caixin reports that it needs approval from the National People’s Congress and will be flagged at a meeting in late October.
Leaks suggest that it will include subsidies to replace old washing machines and so forth, as well as direct hand-outs for families with more than one child. But the alleged sums around $250bn look too small to lift China out of its depression.
Furthermore, the augmented fiscal deficit is already in double digits and total debt exceeds 300pc of GDP. This did not matter when nominal GDP was growing fast. It matters now that the GDP deflator is negative. China is already in the early stages of a debt compound snowball. In my view, China will require quantitative easing and central bank funding of state borrowing along Japanese lines. But this is not on the table.
The Politburo has told us what it wants to do. It wants to export its way out of a deflationary slump by further over-production, and by further conquests of the global market. The rest is mostly noise.
This article is an extract from The Telegraph’s Economic Intelligence newsletter. Sign up here to get exclusive insight from two of the UK’s leading economic commentators – Ambrose Evans-Pritchard and Jeremy Warner – delivered direct to your inbox every Tuesday
Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.
