China’s policy measures: reasons for optimism and cynicism

October 22, 2024
Seema Shah
Chief Global Strategist
Han Peng, CFA
Director, Multi-Asset Research
Jeff Kilkenny, CFA
Portfolio Manager, Equities
Christopher Leow, CFA
Chief Investment Officer, Asia Equities

In recent weeks, Beijing policymakers have begun to roll out a significant package of easing measures designed to lift China from its prolonged period of economic weakness. While the sense of urgency behind these series of announcements is encouraging, it remains to be seen whether the measures may stimulate Chinese economic growth out of its doldrums.

So far, the measures have centered on aggressive monetary policy easing measures aimed at underpinning the beleaguered real estate market and Chinese equities. However, that was coupled with a series of pledges to boost fiscal spending and other non-monetary measures to stabilize the problematic property sector. Global markets initially reacted quite positively, with the MSCI China Index and the Shanghai Composite Index notching more than 20% gains in a few days. Since that initial surge, markets have been drifting lower as questions remain about the size and implementation of the various measures.

Persistently weak economic growth triggers aggressive easing measures

The People’s Bank of China (PBoC), together with two financial regulators, announced a series of easing measures aimed at supporting real estate demand by cutting mortgage rates, reducing downpayment requirements, and unveiling a plan to encourage banks to finance purchases of housing inventory from distressed developers.

Authorities also created a Rmb800bn lending pool to provide liquidity to support the equity market through various market participants and pledged to increase that amount if needed. The PBoC is also considering a National Stabilization Fund, which would involve government sponsorship of the equity market.

These measures are aimed at stabilizing and underpinning China’s soft economic performance as the surge in economic growth that followed 2022’s lifting of Beijing’s harsh zero-COVID policy dissipated. Both consumer and investor confidence remain deeply depressed, scarred by the pandemic, and further dragged down by weakening household incomes and persistent fears of a deflation trap stemming from the troubled real estate market. Multiple rounds of policy actions through the last two years have fallen far short, failing to recognize that a lingering property rout along with indebted local governments require meaningful stimulus, effective implementation and—most importantly—fiscal expansion. As a result, fears blossomed that China may miss its 5% GDP target for 2024, raising pressure on the Politburo to act aggressively to stimulate economic growth and squelch rising talk of “Japanification.”

Two weeks following the stimulus announcement, policymakers in China further announced specific policies on local government debt relief, bank recapitalization, property buyback, and poverty alleviation. While the plans fall short of concrete numbers investors were keenly looking for, the Ministry of Finance (MoF) did emphasize that the central government has the capacity to increase fiscal deficit and issue more treasury bonds. The PBoC and MoF also set up a joint working group to strengthen collaboration on treasury bond operations, increasing the likelihood of coordinated monetary and fiscal stimulus.

Market optimism will be tested

Investors welcomed last month’s news with cautious optimism. The fiscal pledge announcement suggests that policymakers finally recognized that the lingering property rout and indebted local governments require meaningful fiscal expansion—and that monetary stimulus typically proves most effective working in conjunction with fiscal stimulus.

Ultimately, provided the magnitude of the fiscal measures is sizeable, and policymakers proactively and sufficiently target rejuvenating the property sector, prospects for China’s economy are likely to improve. This stimulus package may mark a pivotal moment for China—but it all comes down to the details.

Investor perspectives

Experts across Principal Asset Management are watching closely to gauge how China’s fiscal and monetary policy announcements will influence both Chinese equities, as well as the broader economy.

Jeff Kilkenny, CFA
Portfolio Manager, Equities

While the initial market response to the twin announcements was positive, questions over the impact on the underlying Chinese economy remain.

It's clear that the scale of financial commitments from policymakers in China has significantly increased, with references to “trillions” being earmarked for various initiatives such as debt swaps, fiscal stimulus, and equity support packages. When compared to the Global Financial Crisis, however, the initially reported RMb2 trillion package represents a low single-digit GDP stimulus (about 1.5% of GDP), versus the double-digit fiscal stimulus in the U.S. during the GFC. As such, the fiscal package needed to pull China’s economy out of its malaise likely needs to be significantly increased, at least to Rmb 10 trillion (7.5% of GDP), before investors can start to feel confident that it will be sufficient. Despite there being no concrete figures yet, markets do seem to be noticing the CCP’s resolve to stabilize the property market and address the funding challenges faced by local governments. But frustration may set in as specific amounts of financial commitments remain illusory.

Other concerns outstanding include hesitancy among government officials and banking authorities throughout China to approve projects and investments, without a clear understanding of what the government’s expectations are. So far, local and national officials have been left to themselves to define and understand the nebulous nomenclature used by the ruling Communist Party such as “high-quality growth,” leaving officials to wonder what investments take priority. To allay such concerns, these officials need assurances that they will not be blamed for the outcomes of their investment decisions, as well as clarity on just how to effectively implement the stimulus measures.

Chris Leow, CFA
Chief Investment Officer, Asia Equities

Although no hard numbers have been attached to the fiscal stimulus package, that may be a factor of the CCP’s bureaucracy. It is likely that the National People's Congress (NPC) will need to approve the numbers proposed by the Ministry of Finance and the next NPC meeting probably won’t be held until late October or early November at the earliest.

While there can be debate as to why this is such a drawn-out process, the answer could well be that the Politburo just recently decided to pivot on issuing more central government debt and now the massive bureaucracy is beginning to work on it. And that will take time. The key though is that Beijing may no longer see more stimulus as being taboo.

Still, the most important signal from the central government is that they will roll out more countercyclical fiscal measures and there is still plenty of scope for the central government to raise debt, lift the deficit-to-GDP ratio and stimulate the lagging economy. At the end of the day, this is what really matters to investors.

Macro views
Equities
Disclosure

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