Beijing’s promised stimulus likely won’t pull economy out of doldrums

Global market watchers were buoyed by Beijing’s recent fiscal commitments to lift the country’s economy out of its prolonged slump. However, analysts fear the promised “trillions” in stimulus may fall some way short of what is needed to lift the world’s second-biggest economy out of the doldrums.

Beijing has promised a reported RMB2 trillion (AU$423 billion) in stimulus, including various initiatives such as debt swaps, fiscal stimulus, and equity support packages, as well as monetary policy easing measures aimed at boosting a beleaguered real estate market, in a bid to revive its ailing economy.

This also includes a RMB800 billion lending pool to provide liquidity to support the equity market through various market participants, with pledges to increase that amount if needed.

Two weeks after the stimulus announcement, policymakers in China further announced specific policies on local government debt relief, bank recapitalisation, property buyback, and poverty alleviation.

After an unsettling delay, Beijing’s recent fiscal pledge suggests a long-awaited recognition by policymakers that the country’s lingering property downturn and indebted local governments “require meaningful fiscal expansion”, according to analysts from Principal Asset Management (PAM).

However, the fiscal package necessary to “pull China’s economy out of its malaise” likely needs a significant boost to deliver more than just a quick sugar hit.

Indeed, while global markets initially reacted positively to this stimulus promise, PAM noted, with the MSCI China Index and the Shanghai Composite Index gaining 20% in just a few days, these gains have largely evaporated as questions remain about the size and implementation of the various measures.

China’s initially reported package represents just 1.5% of GDP. This is well short of the 7% of GDP in stimulus delivered by the US Government during the 2007-2008 Global Financial Crisis – a recession, coincidentally, also driven by a real estate crash.

As well, measured against the US’s Covid-19 response, where the Government committed more than one quarter (27%) of its GDP in stimulus, China’s pursestrings appear unreasonably tight.

Chris Leow, CFA chief investment officer, Asia Equities at PAM argues that China’s policymakers will need to commit at least RMB10 trillion (AU$2.1 trillion), or 7.5% of GDP, to revive its ailing economy – a figure, he says, is also sufficient to revive investor confidence.

He adds: “Despite there being no concrete figures yet, markets do seem to be noticing the CCP’s resolve to stabilise 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.”

Nevertheless, a positive takeaway is that Beijing has shown its willingness to pursue fiscal and monetary stimulus to revive economic growth, no longer seeing such actions as “taboo”, PAM says.

“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.”