The Hong Kong market was down almost 10 per cent on the day.
Iron ore prices, always a good barometer of the perceived outlook for China’s economy, had also surged to five-month highs after the PBOC’s announcement. They, too, fell back as the disappointment flowing from the NDRC briefing spread.
The expectations may have been misplaced. The NDRC is a planning agency, not an implementation agency. It is the Ministry of Finance that could be expected to unveil any major new stimulus measures, and it remains possible that it could do so either later this month, or at least before the end of the year.
For Xi, “common prosperity” means less conspicuous income and wealth inequality.
While the NDRC did express confidence that China would meet its growth target of “around 5 per cent” for this year, the World Bank (also on Tuesday) maintained its projection of 4.8 per cent growth in GDP this year. It expects growth of only 4.3 per cent next year. There are a lot of private sector economists with similar expectations of slowing growth.
The policymakers in Beijing could capitalise on the excitement and paper wealth that the PBOC’s package has generated – the CSI 300 is up almost a third since that announcement, albeit still 27 per cent off its record level achieved in early 2021 – if they followed up with significant fiscal stimulus.
The PBOC not only ignited the sharemarket but, in the major cities, at least, there was a significant surge in high-end property market activity and spending during the “Golden Week” holiday to celebrate China’s national day that ended Monday was also up significantly on last year’s (although still lower than 2019’s pre-pandemic levels).
While it is China’s still-shrinking property sector that is the most significant contributor to its households’ risk-aversion, until a fortnight ago, the equally dreadful performance of China’s sharemarkets was also a major factor. The property and sharemarkets have been major repositories of households’ wealth.
The PBOC’s actions are the first by the Beijing policymakers that have had a materially positive effect in the three years since China Evergrande defaulted on its debts and triggered the continuing implosion of the property market.
Chinese President Xi Jinping is displayed on a screen during the evening gala evening on October 1 in 2019 held on Tiananmen Square for the 70th anniversary of the founding of the People’s Republic of China.Credit: nnaebennett
Until that monetary policy stimulus was unveiled Beijing’s measures had largely been cautious, small-scale, piecemeal and largely ineffective.
Xi Jinping and the rest of China’s leadership have been reluctant to embark on large-scale stimulus to rekindle household consumption because Xi believes such measures are wasteful and reward the lazy.
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There are also memories of the last big stimulus package, in response to the 2008 financial crisis, which generated a property construction and investment and infrastructure investment boom, and the massive over-investment and excess inventory of housing and under-utilised and over-capitalised infrastructure that created the foundations of its economic challenges today.
Xi’s preferences lie towards “new quality productive forces”, or the big subsidies and non-financial assistance China has provided to its advanced manufacturing sectors such as electric vehicles, semiconductors, aviation, solar and biotechnology as part of its rolling five-year economic plans.
He wants China to export, rather than consume, its way to more robust growth while developing an independent capacity within China to produce and dominate the technologies central to economic and geopolitical leadership over the next several decades.
It is that strategy that has resulted in significant excess capacity across China’s economy, leading to increased industrial output and volumes of exports but slumping prices and profitability. It has also generated a growing protectionist backlash from China’s major trading partners.
The other side effect of centrally driven economic plans that favour large state-owned or directed firms is that it sidelines to some extent China’s entrepreneurial private sector companies, which represent about 40 per cent of Chinese business enterprises but have historically driven about 60 per cent of economic growth.
Xi’s crackdowns on the property, technology and financial service sectors have made those companies defensive and, like Chinese consumers, risk-averse. For Xi, “common prosperity” means less conspicuous income and wealth inequality.
One can understand why the leader of a communist party might have those convictions, but they, and the fear generated by his anti-corruption and national security drives, aren’t conducive to private sector confidence, risk-taking and investment.
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Beijing needs to restructure its local governments’ finances, which are over-laden with debt, and restrict the ability of that tier of government to boost the education, health and social welfare spending that might provide some stimulus.
It also needs to recapitalise China’s weaker banks, deal more directly with the massive over-hang of unsold and uncompleted property and become more serious about measures to encourage its households to start tapping into their record levels of savings.
If it can address some of the more obvious threats to growth and stability, it might also be able to extricate itself from what might otherwise be a continuing deflationary spiral into, with a shrinking population, economic stagnation.
It needs a big fiscal stimulus package to capitalise on the big bounce in the sharemarket and generate some confidence among its battered consumers that the future looks brighter than the recent past.
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