Victor González 欧谷国’s Post

A Chinese flag flutters on top of the Great Hall of the People ahead of the opening ceremony of the Belt and Road Forum (BRF), to mark 10th anniversary of the Belt and Road Initiative, in Beijing, China October 18, 2023. Edgar Su | Reuters BEIJING — China is set this week to kick off its annual parliamentary meetings, which investors are watching closely for signals on economic stimulus. The country’s gross domestic product grew by 5.2% in 2023, but overall recovery from the Covid-19 pandemic was slower than many had expected. A prolonged slump in the massive real estate market and falling global demand for Chinese exports have contributed to low levels of consumer and business sentiment. That’s all led to questions over whether Beijing will step in with large-scale support. So far, authorities have been relatively reserved. Beijing signaled in December that any new policy support would be “appropriate,” said Wang Jun, chief economist at Huatai Asset Management, adding “there’s no way” that stimulus would be as large as it was in 2008. That’s according to a CNBC translation of his Mandarin-language remarks. China’s economic policy is typically set at an annual meeting in December by leaders within the ruling Communist Party of China. The meetings this month, known as the “Two Sessions,” are at the government, instead of party, level and typically release more details on policy plans, such as the GDP target for the year. Wang said he is watching for comments on authorities’ plans for the real estate sector, capital markets and local government finances. Back in 2008, when the world was reeling from the financial crisis, China unleashed a massive stimulus package to sustain growth with greater demand. While the economy rebounded, the measures drew criticism for a resulting surge in local government debt. Beijing in recent years has emphasized the need to stem financial risks and clamped down on real estate developers’ high reliance on debt for growth, an issue tied to local government finances. This time around, China’s monetary policy also faces constraints on how far it can deviate from the U.S. Federal Reserve’s interest rate path. GDP and other economic targets The Chinese People’s Political Consultative Conference, an advisory body, is set to kick off its annual meeting on Monday. The following day the National People’s Congress legislature is due to begin its meeting. Tuesday is also when the country’s premier is expected to share the year’s targets for GDP, employment and other economic indicators in what’s called the “Government Work Report.” “The target will likely remain relatively high,” said Bank of China’s chief researcher Zong Liang, noting GDP grew by 5.2% last year. That’s according to a CNBC translation of his Mandarin-language remarks. He expects the target for the fiscal deficit will be around 3.5% and that monetary policy will also be relatively

China's leadership is showing real pessimism on the Chinese economy -- judging from today's People's Daily frontpage top story, which is on China's 9/26 Politburo meeting. Take-away: China is doubling-down on government intervention to halt market's pessimistic outlook. That includes renewed emphasis on fiscal stimulus, loosening monetary policy, and lifting various restrictive policy hurdles to investment, all in an attempt to salvage China's market confidence. 5 points that stand out from the Politburo meeting's readout: 1. Fiscal stimulus: "Strengthen degree of counter-cyclical fiscal and monetary policy adjustments. ENSURE necessary fiscal expenditures (get made)" Sidebar: - What are "3 guarantees"? Guarantee that people get basic livelihood, get salaries paid, and that offices stay open.  So let's do a verbal logic exercise: When the central government is announcing major fiscal stimulus for the explicit objective of ensuring these, it shows that it feels at this current rate, there is real systemic risks of lights going dark at the local level, if the center doesn't provide assistance asap. 2. Banks: "Implement forceful lowering of reserve requirements and of interest rates" Ok, so it's to lower the cost of borrowing to make Chinese businesses feel more confident about borrowing & investing. Which is fair, it's what US govt does just before presidential elections, too... (#KamalaBump) 3. Housing: "Must respond to people's concerns, 'adjust house purchase restriction policies, and lower interest rates for mortgages." Yes. So Politburo is acknowledging that its restrictive housing policy over the last decade wasn't quite "responding to people's concerns", and that it's, if not wrong-headed and myopic, at least in need of major "rolling updates". 4. Capital markets: "Must reinvigorate capital markets. #Boldly infuse medium-to-long term capital into the market by removing the barriers to entry for social insurance, insurance, and wealth management dollars." 5. Acknowledge existence of widespread bankruptcy risks: "Must support publicly traded companies mergers, acquisitions, and restructurings... and study & unveil new policy measures to protect small and medium investors".

"The Politburo meeting also showed that China’s top leaders are aware of the problems on the ground and are willing to face them, removing another source of anxiety for investors. For some time, China has sent confusing signals to the market, going so far as to label not-so-positive economic views and comments as unwelcome or even acts of hostility." If that was the case, I hope it lasts until they are almost out of the woods. "China’s national security ministry threatened to go after those who dared to “short” the country’s assets through words or actions. Such warnings frightened investors away, as there’s no point going “long” if going “short” is not allowed." Not only China, but also Korea. But China does get a bad rap. "The Politburo statement last week, however, stated that China must face difficulties in a “straightforward” manner, an acknowledgement that the country’s economic woes are not just narrative nonsense to be rebuffed but real challenges to be tackled." "But it should be noted Beijing’s policy shift is much more than a cyclical adjustment. The change in tone from China’s top leaders in itself marks a milestone in the history of Beijing’s economic management. China’s leadership is showing the world that it listens, cares and respects the market. This deserves applause, and that is why the market reacted so fervently." Let me amend the last sentence: "China’s leadership is showing the world that it (can) listen, care and respect the market. This deserves applause, and that is why the market reacted so fervently." Is it enough? Because jobs don't magically appear without the means to pay salaries - sustainably. "More often than not, the state and the market were not on the same page, resulting in unnecessary competition, tensions, and losses. China’s once vibrant private equity market is a typical example of how interventionist state policies and government money have elbowed out market-oriented practices and institutions." Let me point out that Beijing has wanted to reduce local govt debt since 2014 (it grew), tried to cool the real estate industry since 2017 (trade war happened, Beijing blinked), tried to rationalise the steel industry (output kept going up) - it is as if directives were suggestions. And they were, Beijing told them to do A but not let GDP go down - the local govts responded by not letting GDP go down and continuing A, B, C, .... Beijing accepted it for years. "Some economists are right to note that Beijing’s latest policy package is not a silver bullet. China’s structural problems such as an ageing population and geopolitical tensions have no quick fixes, and there is still a question mark of how many trillions of yuan the finance ministry can set aside to arrest a property market slump." Li Qiang looks relieved though - which makes me think that the seniors in CCP told Xi to let Li handle the economy - because let's be frank, you're a tyro at understanding market forces.

There’s nothing inherently wrong or bad about policy u-turns but the manner in which they are undertaken by the Chinese authorities leaves a lot to be desired. They also reveal three underlying features of policymaking in the mainland: - the growing influence of ideology and morality, - volatility and fragility of policies, and - the fallacy of Chinese exceptionalism. On the third point, I argue in this piece for The Diplomat that “prior to last week’s announcements, (the) defenders of Chinese exceptionalism had argued that the authorities had little to learn from the experience of the United States during the Global Financial Crisis. They pointed to the high levels of indebtedness and the high inflation that quantitative easing and fiscal stimuli were supposed to have caused. They pontificated about how unlike the fiscally reckless U.S. or economically depressed Europe, China has always maintained a careful balancing act between growth and sustainability. More egregiously, some even said that China was undergoing a “beautiful deleveraging” as part of its transformation into a high-quality, developed economy. According to these defenders, ‘a US$1 trillion property bailout is the last thing China’s economy needs,’ and the falling stock market was a necessary and even healthy adjustment as China pivoted away from property investments and financial speculation to ‘new quality productive forces’ (party speak for advanced manufacturing). In light of last week’s announcements, intellectual integrity requires these defenders of Chinese exceptionalism to criticize the PBOC for using debt and monetary stimulus to boost asset prices and reflate the economy. But as with the defenders of zero-COVID, these monetary and fiscal hawks are more likely to slink away. Alternatively, they may try to characterize the stimulus as being a prudent, carefully calibrated, and well-designed response that does not detract from the path of high-quality development. Clearly, these defenders of Chinese exceptionalism do not let facts get in the way of their good story.”

“China NewsChina’s seemingly outsize policy stimulus last week took many of us by surprise. The nation’s financial authorities apparently came to the rescue with their own version of a ‘big bazooka’. At least that was the initial verdict of an explosive rally in the Chinese equity market. With the Chinese Communist party’s Politburo sending a message of more to come, is the country’s long economic nightmare now over? If it were only that easy. China is at risk of falling into a Japanese-like quagmire characterised by stagnation and deflation as a result of the bursting of a major debt-fuelled asset bubble. The comparison is far from perfect. China still has untapped sources of future growth. China also benefits from understanding the lessons of Japan. Being forewarned, however, is not the same as being pre-emptive. The jury is still out on whether China has succumbed to the Japanese disease. But Chinese policymakers should err on the side of acceptance rather than denial of the need for action.” “China has experienced its most severe whiff of deflation since the 1980s, as well as a growth shock on a par with that in Japan. China’s GDP growth rate is decelerating by six percentage points from the 10 per cent surge from 1980 to 2010 to the IMF’s projected increase of around 4 per cent over the next five years, virtually the same as that which hit Japan when its economic growth went from 7.25 per cent from 1946-90 to just 0.8 per cent from 1991 to 2023. Japan not only provided a template of what to avoid but the ‘Abenomics’ framework of the late prime minister Shinzo Abe offered a prescription for how to get out of the quagmire. It was broken down into three ‘arrows, as Abe dubbed them — monetary, fiscal, and structural. The theory was simple: powerful fiscal and monetary stimuli were necessary to provide Japan with escape velocity while structural reforms were vital for an enduring recovery. In the end, Japan lacked the political will for the heavy lifting of structural change.” “Could the same fate await China? Beijing’s latest stimulus appears to be an impressive first arrow. Large interest rate cuts are especially significant. However, despite the seemingly extraordinary 25 per cent in the surge CSI 300 Index following China’s policy pronouncements, the market remains fully 31 per cent below its February 2021 high. In the Politburo statement, actions were framed more by broad promises than specifics. China faces three major structural challenges: demographic, productivity and chronic under consumption. The Communist party’s recent Third Plenum took steps to address some issues, but this was mainly a small rise in China’s incredibly low retirement age. Meanwhile, actions in support of the private sector are more rhetorical than substantiative in rolling back regulatory and political constraints that have been in place since mid-2001. Nor has Beijing faced up to China’s most daunting impediment to structural rebalancing.”

Through the second half of 2023, the gap between China’s impressive official data and visibly underwhelming consumer demand, unresolved local government debt problems and an unprecedented drop in foreign direct investment was stark. The China Pathfinder framework scans for evidence of market policy reorientation to fix these problems. But in this coverage period (July–December 2023), Beijing’s response was limited. Officials redoubled efforts (and incentives) to encourage foreign investment and trade, pledged to loosen cross-border data transfer rules, and increased deficit spending limits to stoke anemic demand. China’s government also simultaneously threatened economists with consequences for even talking about bearish signals and discontinued unflattering economic data, severely aggravating credibility concerns. Policymakers did next to nothing to tackle the real structural problems. Though we expect the severity of 2022–23 declines to set China up for a modest cyclical rebound in 2024, long-term growth potential will disappoint until fundamentals are addressed.

As China's economy struggles and its equity market tumbles, a chorus of voices are starting to call for interest rate cuts from the PBoC. But we believe that China's economic struggles are more structural than cyclical in nature. Interest rate cuts therefore won't provide much support. What's needed is deeper reform - and since that seems unlikely to materialise, a long and difficult adjustment looms. More here: https://lnkd.in/eakK68De

**China's Economic Stimulus: A Temporary Fix or Structural Fault Line?** China's economy is in the spotlight as recent stimulus measures spark both optimism and caution. While the People's Bank of China's stimulus package aims to address lending constraints and boost stock market activity, experts argue that these measures alone may not sufficiently address deep-seated challenges facing the economy. China grapples with weak consumer demand and a struggling property market, which has significant implications for household wealth and local government funding. The economy is also showing signs of deflation, with consumer prices rising at a sluggish pace. Financial analysts contend that supply-side policies may not effectively address the demand problem and suggest that direct stimulus to households would be more effective. However, ideological resistance could hinder the implementation of such measures. Despite the scale of the current stimulus package, it falls short of previous interventions. Existing financial imbalances and ongoing trade conflicts with the U.S. and EU pose further challenges. As China navigates these economic waters, the effectiveness of its stimulus efforts remains to be seen. The government faces a delicate balancing act between addressing immediate concerns and avoiding unintended consequences. Read more at The Finance Herald to delve deeper into the complexities of China's economic landscape. https://lnkd.in/d_Xi52qg

NSIGHT: Bold policy moves might not arrest China economic slowdown In a bold move to revitalize its economy and restore investor confidence, China unveiled a comprehensive package of monetary and fiscal measures less than a week before the country goes on a week-long holiday. Concerns about fundamental weakness in the world’s second-biggest economy, however, temper optimism on the positive near-term impact of the measures. #ICIS #China #economy #PBOC #interestrates #ING #DBS #inflation #PMI https://lnkd.in/g8R7ZkA2

Janet Yellen's during her recent visit to #China highlighted the issue of Chinese overcapacity, however, it's crucial to recognize that #overcapacity is merely a symptom and not the main problem. Michael Pettis's insightful analysis in the Financial Times sheds light on the true underlying issue: excess savings driven by implicit and hidden transfers to subsidise production, which results in suppression of domestic consumption. To tackle the problem of excess savings effectively, there's a need to 1) focus on raising income levels and 2) strengthening social security nets. Additionally, 3) gradually revaluing the RMB higher can help rebalance the economy and tilt the scales more towards domestic consumption than production. These measures would not only address the issue of excess savings but also promote sustainable and inclusive growth in the longer term. As discussions on global trade dynamics continue, it's essential to shift the focus from addressing symptoms to tackling the underlying causes. By addressing the root problem of excess savings, China and its trade partners can work towards a more balanced and resilient global economy. #China #Chinaeconomy #economics #economicdevelopment #exports #trade #savingsglut #consumption