There was a moment of grace on Tuesday for investors, market analysts and monetary authorities when Beijing announced measures to try to revitalize 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 creating 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 reduced the People’s Bank of China’s medium-term interest rate and policy interest rates for banks and customers. Homebuyers can now also spend less money on their purchases, in a bid to breathe life into China’s moribund asset market.
The immediate reaction from Wall Street was all-out jubilee. Since the pandemic, China’s leader, Xi Jinping, has done little to stop the bleeding in the country’s property market or to get China’s ailing consumers to start spending money again. The Shanghai Composite lost nearly a quarter of its value. American companies in China are getting crushed. Foreign investors are pulling record amounts of money out of the country. This week’s announcements sent Wall Street into a state of rapture, hoping that the Chinese Communist Party is now, as in years past, prepared to catch a falling knife. The Golden Dragon index — a collection of Nasdaq-traded companies that do most of their business in China — rallied 9% following the announcements. Financial-news talking heads heralded this as a clear sign from Beijing that policymakers were getting real about stopping China’s descent into a deflationary funk. There would be more mergers and acquisitions! Lower rates could mean more private-equity activity! The famous Beijing “bazooka” could finally be on the way!
But honey, they are delusional.
Xi’s Beijing lacks the will and strength to turn China’s economy around. At the heart of its challenges is a lack of customer demand and a housing 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 the inventory of Chinese apartments to 2018 levels, 7. 7 trillion yuan would be needed. China’s property market is so overbuilt and indebted that the trillions of dollars in stimulus needed to solve the challenge, and return its entirety to the local governments that funded it, would make even a rapacious fundraiser like OpenAI CEO Sam Altman blush. The “stimulus measures” proposed through Chinese policymakers are just a drop in the bucket 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.
Given that context, many Chinese people are not eager to spend. Consumers are trading down to cheaper products, and second-quarter retail sales grew by only 2.7% from the previous year. In a recent note to clients, the business surveyor China Beige Book said that business borrowing had barely budged since all-time lows in 2021, during the depths of the pandemic. Bottom line: It doesn’t matter how cheap and easy it is to access loans if no one wants to take one out.
“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 lead to uncontrollable inflation. This goes against what economists would say about 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 seen 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 it doesn’t want to blow much more or see it burst in spectacular fashion. Plus, there’s Xi, who seems fairly uninterested in restructuring the property market. He wants government investment to focus on developing frontier technology and boosting exports to grow the economy out of its structural debt problems. But those new streams of income have yet to materialize for China, and establishing them will take time and working through trade conflict, principally with the US and the European Union. Consider the easing measures we’re seeing as something like a moment for markets to catch their breath — a respite from what has been a constant stream of bad economic news. But a respite is all it is.
Linette López is a senior correspondent for Business Insider.
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