It was the economy’s performance in the first nine months of this year, where growth was undershooting that target, that caused the People’s Bank of China to launch a major package of monetary policy stimulus last month. A range of measures were designed to boost an ailing sharemarket, inject liquidity and greater lending capacity into the major banks, and hopefully stimulate some activity in the depressed and shrinking property market.
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The PBOC measures have had some success. The sharemarket initially soared and, while it has since fallen back, remains well above the levels it was experiencing before the stimulus. There have also been some tentative signs of life in the property market, with sales activity picking up a little in the major cities.
Monetary policy, however, has some limitations. The PBOC can make loans cheaper and more available but, unlike its funding for acquisitions of shares by state-owned or regulated institutions, it can’t force households to borrow. Its lowering of interest rates and injections of liquidity into the banks have been likened to pushing on a string.
That’s why policymakers in Beijing have been focused on adding a fiscal element to the PBOC’s existing stimulus.
There have been clear signals from Beijing that no fiscal largesse would flow from this week’s meeting.
Given the proximity to the US election, China’s policymakers might keep something significant in reserve, with a consensus among China watchers that another Trump presidency would result in a significantly greater fiscal response than if Harris wins.
A Kamala Harris presidency would be less threatening to China and more predictable.Credit: AP
There’s a Politburo meeting of the Communist Party’s 24 most senior officials, including Xi Jinping, scheduled for December, followed almost immediately by the Central Economic Work Conference that will set the economic agenda for 2025. Those meetings would seem better timed to respond, if necessary, to the US election outcome.
What is expected from this week’s discussions is a debt swap for local governments that would enable them to bring the off-balance-sheet, or “hidden”, borrowings in local government financing vehicles onto their balance sheets, with that debt replaced by sovereign debt with significantly lower interest costs.
Estimates of the overall package size range from about 6 trillion yuan ($1.3 trillion) to 10 trillion yuan, with the restructuring of local government balance sheets accounting for the larger part of it.
That would free up some funding capacity for the entities that do the most government spending in China. To the extent that they use that capacity, it would provide some stimulus.
The local governments’ capacity to spend has been substantially eroded by the distressed state of China’s property markets, where sales and related activity once generated 30 per cent or more of their revenues.
It is hoped that the debt swap will enable them to fund their normal activities – paying hitherto unpaid civil service salaries and suppliers – and let them acquire undeveloped land from developers, thereby injecting some liquidity into liquidity-constrained property companies.
The other element expected to be announced within that envelope of the 6 to 10 trillion yuan of special sovereign bond issues is the recapitalisation of China’s large state-owned banks. They have been damaged by the implosion of the property sector, whose net interest margins have been squeezed by the continuing falls in the PBOC’s policy rates even as Beijing has directed them to lend more.
The hope is that the recapitalisation will enable them to lend profitably at lower interest rates and restore their capital bases.
In effect, at the core of the measures expected is the recapitalisation of the key institutions within the economy that have been most hit by the property market’s collapse and economic slowdown. Beijing is more focused on financial stability than boosting consumption.
It is possible some direct support for households might emerge from this week’s meeting, but large-scale stimulus is unlikely given Xi’s distaste for what he regards as wasteful spending. He prefers to focus government spending on advanced manufacturing and his strategy of dominating key technologies.
If there were to be any efforts to boost consumption, it would more likely be directed at the social security net – health and education services and support for the unemployed and lowest income groups – but limited in scope and scale.
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This week’s meeting of China’s senior officials appears to have the simple goal of shoring up financial stability and achieving the party’s growth target for this year while remaining open-minded about the possibility of doing more, particularly to boost domestic demand, if deemed necessary later this year or early next.
Whether it will be necessary may depend on the outcome of the US election, with China and economies that depend on it – such as Australia’s – facing very different and more threatened futures if Trump is back in the White House and does what he has said he will do.
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