There was a moment of grace for investors, market analysts and the more sensible monetary brass on Tuesday as Beijing announced exit measures to reinvigorate China’s ailing economy. Pan Gongsheng, 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 to stabilize inventories and announced regulations that would allow Chinese banks to keep less cash. in reserve, freeing up 1 trillion yuan to lend. They also cut the People’s Bank of China’s medium-term interest rate and key interest rates for banks and customers. asset market.
The immediate reaction from Wall Street was all-out jubilee. Since the pandemic, China’s leader, Xi Jinping, has done little to stop the bleeding in the country’s property market or to get China’s ailing consumers to start spending money again. The Shanghai Composite lost nearly a quarter of its value. American companies in China are getting crushed. Foreign investors are pulling record amounts of money out of the country. This week’s announcements sent Wall Street into a state of rapture, hoping that the Chinese Communist Party is now, as in years past, prepared to catch a falling knife. The Golden Dragon index — a collection of Nasdaq-traded companies that do most of their business in China — rallied 9% following the announcements. Financial-news talking heads heralded this as a clear sign from Beijing that policymakers were getting real about stopping China’s descent into a deflationary funk. There would be more mergers and acquisitions! Lower rates could mean more private-equity activity! The famous Beijing “bazooka” could finally be on the way!
But honey, they’re fooling themselves.
Xi’s Beijing lacks the will and strength to turn around the Chinese economy. At the heart of its challenges is a lack of customer demand and a real estate market mired in a slow and deep correction. Xi is ideologically opposed to increasing customer spending through direct stimulus checks. Without will. As for electricity, Goldman Sachs estimated that bringing China’s apartment inventory to 2018 levels would require 7. 7 trillion yuan. The Chinese real estate market is so overextended and indebted that the trillions of dollars of stimulus needed to solve the problem (and return it in full to the local governments that funded it) would make even a rapacious fundraiser like OpenAI CEO Sam Altman , . The “stimulus measures” proposed by the Chinese authorities are just a drop in the bucket, and they know it. Wall Street does it too. But I guess they didn’t learn.
The measures the CCP announced are intended to make it easier for Chinese people to access capital and buy property, but access to debt is not the problem here. People in the country do not want to spend money because they are already sitting on large amounts of real-estate debt tied to declining properties. Seventy percent of Chinese household wealth is invested in property, which is a problem since analysts at Société Genéralé found that housing prices have fallen by as much as 30% in Tier 1 cities since their 2021 peak. Land purchases helped fund local governments so they could spend on schools, hospitals, and other social services — now that financing mechanism is out of whack. Sinking prices in these sectors, or what economists call deflation, has spread to the wider economy. The latest consumer price inflation report showed that prices rose by just 0.3% in August compared to the year before, the lowest price growth in three years, prompting concerns that deflation will take hold, spreading to wages and killing jobs.
In this context, many Chinese are unwilling to spend. Consumers are switching to less expensive products and retail sales in the second quarter rose just 2. 7% from a year earlier. In a recent note to clients, business researcher China Beige Book said corporate borrowing had moved slightly from its record low in 2021, at the height of the pandemic. Bottom line: it doesn’t matter how simple and reasonable the loans are if no one needs to apply for them.
“These mostly supply-side measures would certainly be helpful if the problem in China was that production was struggling to keep up with growth in demand,” Michael Pettis, a professor of finance at Peking University and a Carnegie Endowment fellow, said in a recent 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 best direct way to stimulate demand in a deflationary economy is to send checks to households. But, again, Xi doesn’t need to do that. The Chinese president is a follower of Austrian economist Friedrich Hayek, who believes that direct stimulus measures distort markets. and cause uncontrollable inflation. This runs counter to what economists would propose for China’s situation, but those who criticize the way Xi does things tend to disappear.
It’s clear that Beijing’s recent moves won’t solve China’s core economic problems. And Wall Street’s excitement misses another key problem: The measures aren’t even all that big. Call it a bazooka or a blitz or whatever, but this stimulus is tiny compared with 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 over $100 billion into ailing regional banks and devalued its currency to boost flagging exports. The CCP has shown that it’s willing to take dramatic action to stabilize the economy. The price of that action, though, is massive debt built up all over the financial system, held especially by property companies, state-owned enterprises, and local governments. In the past, monetary easing calmed gyrations in the financial system, but growth has never been this slow, and debt has never been this high. The problem does not match the price tag here.
The Chinese Communist Party has a bubble on its hands, and it does not want it to burst any more or burst dramatically. Then there is Xi, who does not seem interested in restructuring the real estate market. It needs government investments to focus on developing complex technologies and boosting exports to lift the economy out of its structural debt problems. But these new profit resources have not yet materialized for China, and their creation will take time and will require overcoming industrial conflicts, basically with the United States. and the European Union. Let’s think about We’re looking at easing as a kind of moment for markets to catch their breath: a respite from a steady stream of bad economic news. But it’s just a respite.
Linette Lopez is a senior correspondent for Business Insider.
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