There was a moment of grace on Tuesday for investors, market analysts and monetary authorities as Beijing announced measures to try to reinvigorate China’s ailing economy. Pan Gongsheng, governor of the People’s Bank of China, the country’s central bank, announced that 800 billion yuan, or about $114 billion, would be injected into the stock market. Authorities also said they were discussing the creation of a fund to stabilize inventories and announced regulations that would allow Chinese banks to hold less cash in reserves, freeing up 1 trillion yuan for loans. They also cut the People’s Bank of China’s medium-term interest rate and policy interest rates for banks and customers. Home buyers can now also spend less money on their purchases, in a bid to breathe life into China’s moribund asset market.
Wall Street’s immediate reaction was general jubilation. Since the pandemic, China’s leader Xi Jinping has done little to prevent the country’s housing market from hemorrhaging or to inspire long-suffering Chinese consumers to start spending cash again. The Shanghai Composite lost at most a quarter of its value. American companies in China are being crushed. Foreign investors are fleeing the country with record sums. This week’s announcements have sent Wall Street into a state of ecstasy, with the hope that the Chinese Communist Party is now, as in previous years, in a position to catch a falling knife. The Golden Dragon Index, a collection of Nasdaq-listed companies that do most of their business in China, rose 9% following the announcements. Financial leaders presented this as a transparent signal from Beijing that authorities were, in fact, waking up to their goal of saving China from falling into a deflationary spiral. There would be more mergers and acquisitions! Lower rates may simply mean more personal equity activity! The famous Beijing “bazooka” could, despite everything, be on its way!
But honey, they’re fooling themselves.
Xi’s Beijing lacks the will and strength to turn around China’s economy. At the heart of its challenges is a lack of customer demand and a real estate market in the midst of a deep and slow correction. Xi is ideologically opposed to increasing customer spending through direct stimulus checks. There will be no will. As for electricity, Goldman Sachs estimated that to return Chinese apartment inventory to 2018 levels, 7. 7 trillion yuan would be needed. China’s real estate market is so overbuilt and indebted that the trillions of dollars in stimulus needed to solve the challenge, and return it in full to the local governments that funded it, would make even a rapacious fundraiser like the CEO of OpenAI blush. , Sam Altman. The “stimulus measures” proposed by Chinese policymakers are just a drop in the ocean and they know it. Wall Street too. But I guess they haven’t learned.
The measures announced through the CCP are aimed at facilitating China’s access to capital and the acquisition of real estate, but access to debt is not the challenge here. People across the country don’t need to spend cash because they are already in debt with giant asset debt tied to failing properties. Seventy percent of Chinese families’ wealth is invested in real estate, posing a challenge as Société Générale analysts found asset values have fallen by up to 30% in Tier 1 cities from their peak in 2021. Land acquisitions have helped finance local governments. so that they can finance schools, hospitals and other social facilities, now that the financing mechanism is out of control. Falling values in those sectors, or what economists call deflation, has stretched the economy. The latest consumer price inflation report showed prices rose just 0. 3% in August from a year earlier, the weakest price growth in three years, raising concerns that deflation could set in, extend to wages and eliminate jobs.
In this context, many Chinese are not willing to spend. Consumers are turning to less expensive products and retail sales in the second quarter rose just 2. 7% from a year earlier. In a recent note to clients, business researcher China Beige Book said corporate debt had moved slightly from its record low in 2021, at the height of the pandemic. Bottom line: It doesn’t matter how simple and reasonable it is to give loans if no one needs to apply for them.
“These measures, largely on the supply side, would certainly help if the challenge in China of keeping production up to par requires growth,” said Michael Pettis, a professor of finance at Peking University and a member of the Carnegie Endowment. , in a recent report. conference. post on
The best direct way to stimulate demand in a deflationary economy is to send checks to households. But again, Xi doesn’t need to do that. The Chinese president is a follower of Austrian economist Friedrich Hayek, who believes that direct stimulus measures distort markets. and cause uncontrollable inflation. This goes against what economists would propose for China’s situation, but those who criticize Xi’s way of doing things tend to disappear.
It is clear that Beijing’s recent measures will not solve China’s main economic challenges. And Wall Street’s enthusiasm overlooks another key challenge: the even-so-important metrics. Call it a bazooka, blitz or whatever, but this stimulus package is minimal compared to what we have noticed from the CCP in the past. In 2009, the government spent 7. 6 trillion yuan to save the economy during the global economic crisis. In 2012, it spent $157 billion on infrastructure projects. In 2015, it pumped more than $100 billion into troubled regional banks and devalued its currency to breathe life into its ailing exports. The CCP has shown that it is willing to take drastic measures to stabilize the economy. The value of this action, however, is the large debt accumulated throughout the economic system, in the hands of real estate companies, state-owned companies and local governments. In the past, economic easing has calmed turbulence in the economic system, but expansion has never been slower and debt has never been higher. The challenge here is not value.
The Chinese Communist Party has a bubble on its hands and does not need to burst any further or see it burst spectacularly. Then there is Xi, who does not seem at all interested in restructuring the real estate market. It needs government investments to focus on developing cutting-edge technologies and boosting exports to lift the economy out of its structural debt problems. But those new profit resources have not yet materialized for China, and creating them will take time and require overcoming industrial conflicts, mainly with the United States and the European Union. Let’s consider the easing measures we’re seeing as a kind of moment for markets to catch their breath: a respite from a constant stream of bad economic news. But it’s just a respite.
Linette Lopez is a senior correspondent for Business Insider.
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