Sure, Wall Street. Go ahead. Ride the dragon.
There was a moment of grace for investors, market analysts and finance insiders on Tuesday when Beijing announced measures to try to revive China’s Chinese economy. Pan Gongsheng, a 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. Policymakers also said they were discussing raising a fund aimed at stabilizing stocks and announced rules to allow Chinese banks to hold less cash in reserves, freeing up 1 trillion yuan to exit under-lending. They also lowered the People’s Bank of China’s medium-term lending rate and key interest rates for banks and customers. Homebuyers can now put less money down on their purchases – a bid to revive China’s moribund property market.
The immediate reaction from Wall Street was total jubilation. Since the pandemic, China’s leader Xi Jinping has done little to stem the bleeding in the country’s housing market or get ailing Chinese consumers to start spending again. The Shanghai Composite lost nearly a quarter of its value. American companies in China are crushed. Foreign investors are taking record amounts of money out of the country. This week’s announcements sent Wall Street into rapture, hoping that the Chinese Communist Party is now, as in years past, ready to catch a falling knife. The Golden Dragon index — a collection of Nasdaq-traded companies that do most of their business in China — rose 9 percent following the announcements. Financial news talking heads heralded this as a clear sign from Beijing that policymakers have begun to halt China’s descent into a deflationary funk. There would be more mergers and acquisitions! Lower rates could mean more private equity activity! Beijing’s famous “bazooka” could finally be on its way!
But honey, they’re delusional.
Xi’s Beijing lacks the will and power to change China’s economy. At the heart of its problems is a lack of consumer demand and a housing market undergoing a deep and slow correction. Xi is ideologically opposed to restarting consumer spending with direct stimulus controls. Intestate. On the strength side, Goldman Sachs estimated that returning China’s apartment inventory to 2018 levels would require 7.7 trillion yuan. China’s housing market is so overbuilt and indebted that the trillions in stimulus needed to fix the problem — and make the local governments that funded it whole again — would make even a rapacious fundraiser like CEO- ul OpenAI, Sam Altman, to blush. The “stimulus” that China’s policymakers are providing is a trickle in a well, and they know it. Wall Street should too. But I think they haven’t learned.
The measures announced by the CCP are meant to make it easier for Chinese people to access capital and buy property, but access to debt is not the issue here. People in the country do not want to spend money because they are already sitting on large amounts of real estate debt related to declining properties. Seventy percent of Chinese household wealth is invested in property, which is a problem as analysts at Société Generale found that house prices have fallen by up to 30% in tier 1 cities from their peak in 2021. land helped fund local governments so they could spend on schools, hospitals and other social services – now that the funding mechanism is disabled. Falling prices in these sectors, or what economists call deflation, spread to the wider economy. The latest consumer price inflation report showed prices rose just 0.3 percent in August from a year earlier, the slowest price increase in three years, raising fears that deflation will spread, widening on wages and killing jobs.
It is clear that Beijing’s recent moves will not solve China’s core economic problems.
Given this background, many Chinese are reluctant to spend. Consumers are trading up for cheaper goods, and second-quarter retail sales rose just 2.7 percent from a year earlier. In a recent note to clients, business expert China Beige Book said business loans have barely shrunk from record lows in 2021 amid the pandemic. The bottom line: It doesn’t matter how cheap and easy it is to access loans if no one wants to take one.
“These mainly supply-side measures would certainly be helpful if the problem in China was that production was struggling to keep up with rising demand,” said Michael Pettis, a professor of finance at Peking University and a fellow at the Carnegie Endowment. in a recent study. post on X. “But with weak demand as the main constraint, these measures are more likely to boost the trade surplus than GDP growth.”
The most direct way to stimulate demand in a deflationary economy is to send checks to households. But again, Xi doesn’t want to do that. The Chinese president is a follower of Austrian economist Friedrich Hayek, who believed that direct stimulus distorts markets and leads to uncontrollable inflation. This is at odds with what economists would recommend for China’s situation, but critics of Xi’s way of doing things tend to disappear.
It is clear that Beijing’s recent moves will not solve China’s core economic problems. And Wall Street’s enthusiasm misses another key issue: The measures aren’t all that big. Call it a bazooka or a blitz or whatever, but this stimulus is small compared to what we’ve seen from the CCP in the past. In 2009, the government dropped 7.6 trillion yuan to save the economy during the global financial crisis. In 2012, it dropped $157 billion on infrastructure projects. In 2015, it injected more than $100 billion into struggling regional banks and devalued its currency to boost sagging exports. The CCP has shown that it is willing to take dramatic measures to stabilize the economy. The price of this action, however, is massive debt accumulated throughout the financial system, held especially by real estate companies, state-owned enterprises and local governments. In the past, monetary easing has calmed fluctuations in the financial system, but growth has never been this slow and debt has never been this high. The problem doesn’t match the price here.
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 pretty disinterested in restructuring the real estate market. He wants government investment to focus on frontier technology development and boosting exports to lift the economy out of its structural debt problems. But these new revenue streams have yet to materialize for China, and establishing them will take time and resolve the trade conflict, mainly with the US and the European Union. Consider the easing measures we see as a time for markets to take a breather – a respite from what has been a steady stream of bad economic news. But a respite is all it is.
Lynette Lopez is a senior correspondent at Business Insider.