EVER since President Xi Jinping sought to draw a line under China’s slowdown last month, investors have clamoured for him to back up monetary easing with a powerful fiscal stimulus to help fuel one of the nation’s biggest stock rallies in years.
But those who hoped to get an answer on Tuesday (Oct 8) were disappointed. The National Development and Reform Commission (NDRC), China’s economic planning agency, used the government’s first briefing after a weeklong national holiday to announce that a meagre 200 billion yuan (S$36.9 billion) in spending would be advanced from next year, after analysts forecast a fiscal package worth as much as three trillion yuan in the pipeline.
After surging almost 11 per cent at the open, Chinese stocks lost nearly half their gains. Hong Kong shares had their worst day since 2008.
“I don’t know what the chairman of the NDRC was thinking with this,” said Alicia Garcia Herrero, Asia-Pacific chief economist at Natixis. “Frankly the more they wait to clarify, the worse it can be because people will realise there’s no fiscal side to this stimulus – that it’s all monetary, propping up stocks and so on. And that’s quite dangerous.”
The market reaction showed a mismatch between equity investors and officials in Beijing, who expressed confidence on Tuesday that they would hit an economic growth target of “about 5 per cent” this year. The question now is whether Beijing will stop at reaching that goal or do more to pull China out of a deflationary spiral that threatens greater economic pain in the years ahead.
More measures may yet be coming from Xi. The Ministry of Finance, which is typically tasked with issuing bonds to fund stimulus measures and additional spending, is expected to hold a briefing soon that could deliver the kind of stimulus that markets want to see. Banks including Morgan Stanley and HSBC Holdings expect two trillion yuan in stimulus, while Citigroup put the amount at three trillion yuan.
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“Policymakers probably don’t feel a lot of pressure to do more just yet,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics, citing the market rally since late September. “But if markets start to slump on no news in the next few days, they will feel compelled to do more.”
The briefing on Tuesday stood in stark contrast to the one spearheaded by the People’s Bank of China on Sep 24, when central bank governor Pan Gongsheng and other top financial officials unveiled a barrage of measures including interest rate cuts, more cash for banks, bigger incentives to buy homes and plans to consider a stock stabilisation fund. Since then, China’s benchmark CSI 300 Index has rallied more than 30 per cent.
Traders are now reassessing their positions after the NDRC effectively poured cold water on that world-beating stock rally.
“The ball is on Beijing’s court” to prove its desire to fully restore confidence, said Xin-Yao Ng, an investment director at arbdn. “My sense is about a five trillion yuan direct stimulus might be required to keep the market up, a 10 trillion yuan or above stimulus will allow the market to rally on.”
The NDRC, which back in 2008 fleshed out the details of Beijing’s historic four trillion yuan infrastructure spending binge, said on Tuesday that it would speed up spending while largely reiterating plans to boost investment and increase direct support for low-income groups and new graduates, plans already announced before the holiday.
The NDRC officials added that China would continue to issue ultra-long sovereign bonds next year to support major projects. It would make a 100 billion yuan investment in key strategic areas and expedite work on projects worth another 100 billion yuan, but those were funds originally budgeted for 2025.
One key question now is whether authorities are happy with hitting the GDP target or if they want to shore up the real estate sector, according to Larry Hu, head of China economics at Macquarie Group. Adding one trillion yuan in special bonds is enough to hit the growth goal, he said, “but it’s far from enough if the goal is to stabilise the property market”.
“I’m giving them the benefit of the doubt now, given the supportive tone of the Politburo meeting,” Hu said. “But the moment of truth will come, and the housing market is the key thing to watch. If the goal is only to hit 5 per cent, then the property market will continue to weaken, and that will mean investors are expecting too much stimulus now.”
Beijing’s more conservative fiscal stance may reflect concerns about debt. But economists have argued that weak government stimulus amid a property downturn was a key cause of sluggish demand and deflation.
Top leaders have promised in recent weeks to strengthen fiscal policy, but Beijing wants to balance that commitment with managing risks from debt-ridden local authorities, as the real estate slump impacts their ability to generate cash.
The Communist Party also remains reluctant to spur consumption with measures such as cash handouts to a large swathe of the population, preferring so far to keep them targeted to smaller groups of the population.
“We see limited chance of meaningful demand stimulus near term, specifically one that is geared towards consumers,” Morgan Stanley’s Robin Xing and analysts wrote in a note on Tuesday. “Foreign investors could take a ‘not trust but verify’ approach, evaluating Beijing’s commitment on reflation.” BLOOMBERG
