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The initial boost from China's recent economic stimulus is fading, with Beijing's Ministry of Finance set for a crucial briefing as doubts grow over the government's commitment to further actions. Optimism sparked by interest rate cuts and stock investment incentives in late September quickly dissipated after the National Development and Reform Commission (NDRC) failed to announce any major new measures on Tuesday.
By Thursday, China's main stock index and Hong Kong's markets had fallen 6% and 8%, respectively, from their recent highs. The CSI 300 index, representing large-cap stocks from Shanghai and Shenzhen, dropped nearly 3%, while Hong Kong's exchange remained closed on Friday.
More Stimulus Coming?
Beijing has signaled that more economic support measures are forthcoming. The Ministry of Finance, responsible for managing sovereign debt, plans to hold a news conference on Saturday to address the "intensification of counter-cyclical fiscal policy adjustments."
Economists anticipate that the government may authorize another 6 trillion yuan $850 billion) in new central government bond issuances by year-end, as China aims to achieve its annual growth target of around 5%. Additionally, there are expectations that the fiscal deficit could be expanded in the coming weeks, potentially during the upcoming meeting of the National People's Congress Standing Committee. Much of this new fiscal stimulus is likely to be allocated to help bridge funding shortfalls faced by local governments.
China's Property Market Struggles
Despite expectations for more pro-growth measures, many investors and businesses have tempered their optimism regarding the effectiveness of China's forthcoming steps. Analysts suggest that Beijing is constrained by its focus on controlling overall debt levels, shifting from an investment-heavy growth model, and avoiding Western-style welfare systems. A critical issue remains the unresolved crisis in the property sector, which once accounted for a quarter of the country's economy at its peak.
In May, the People's Bank of China introduced a 300 billion yuan lending initiative aimed at helping local governments manage unsold homes. However, analysts have advocated for stronger support, including funding to complete unfinished apartments that have already been sold. So far, policymakers have responded by lowering mortgage rates and relaxing home-buying rules, but these efforts have failed to stop the continued decline in housing prices.
Cameron Johnson, a senior partner at Tidal Wave Solutions, a Shanghai-based supply chain consultancy, noted that many businesses tied to the real estate sector, such as steel producers, have been struggling since China’s 2020 efforts to reduce the property sector's oversized influence on the economy. Johnson added, "The challenge lies in the lack of a clear plan, leaving people uncertain about how to shift growth from real estate to other sectors."
Weak Consumption
A key focus remains on how Chinese leaders will stimulate sluggish consumption. Michael Hirson, head of China research at 22V Research and a former U.S. Treasury representative in China, expressed skepticism about Beijing implementing direct income support for households. He pointed to President Xi Jinping's reluctance to adopt Western-style welfare and the belief that such support would only offer a temporary boost to growth. "Political and practical challenges still stand in the way of large-scale income support," Hirson explained.
Some investors are concerned that the scale of any upcoming fiscal stimulus may be limited due to the ongoing efforts to reduce financial risk. As of March, China's total debt reached 290% of GDP, higher than the U.S. at 255% and the eurozone's 236%, though still below Japan's 399%, according to the Bank for International Settlements. A sharp drop in tax revenue and land sales has left local governments with no choice but to borrow more to increase spending. Despite signs of mounting economic stress, recent stimulus efforts have done little to rebuild confidence.
China is currently experiencing its longest period of low or negative inflation in over two decades, and youth unemployment remained high at almost 19%. Consumer confidence has also hovered around historic lows. Additionally, trade tensions have escalated, with the European Union recently voting to impose tariffs of up to 45% on Chinese electric vehicles.
Market Outlook
China's economic outlook is increasingly cautious as recent stock market declines raise concerns about the effectiveness of potential stimulus measures. With the CSI 300 index dropping nearly 3% and Hong Kong's markets down 8%, investor sentiment is fragile.
Beijing is hinting at further fiscal support, possibly issuing up to 6 trillion yuan ($850 billion) in central government bonds. However, skepticism remains regarding the sufficiency of these measures, especially given the ongoing property crisis and sluggish consumer spending.
Despite easing mortgage rates and relaxed home-buying rules, the property sector struggles, prompting calls for more robust actions to stabilize housing prices and restore investor confidence. Additionally, the longest period of low inflation in over two decades and high youth unemployment complicate recovery efforts.
As China navigates these challenges, investors remain alert to policy developments and economic indicators in the coming weeks.
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