INSIGHT: Bold policy moves might not arrest China economic slowdown

SINGAPORE (ICIS)–In a bold move to revitalize its economy and restore investor confidence, China unveiled a comprehensive package of monetary and fiscal measures less than a week before the country goes on a week-long holiday.

Concerns about fundamental weakness in the world’s second-biggest economy, however, temper optimism on the positive near-term impact of the measures.

• Government efforts to boost economy positive but overdue – economists
• Financial markets euphoria may be short-lived
• August data show further economic deterioration

The People’s Bank of China (PBOC) on 24 September unveiled a package of stimulus measures, featuring cuts to a crucial interest rate and reduced reserve requirements for banks.

Two days before October, the central bank said that commercial banks will be asked to lower their interest rates on existing mortgages to ease burden on households, which could translate to an overall boost in consumption. (adding this bit as this happened over the weekend)

China has plans to issue yuan (CNY) 2 trillion in sovereign bonds this year, according to newswire agency Reuters, citing unnamed sources.

The measures are a step in the right direction, especially as multiple measures have been announced together rather than spacing out individual piecemeal measures to a more limited effect, said Lynn Song, chief economist for Greater China at Dutch banking and financial information services provider ING.

“We continue to believe that there is still room for further easing in the months ahead as most global central banks are now on a rate-cut trajectory. If we see a large fiscal policy push as well, momentum could recover heading into the fourth quarter.”

Following a series of gradual moves to boost growth, economists had been expecting more significant easing measures, which are now seen as overdue.

“The sheer scope and urgency of introducing measures across multiple domains simultaneously underscores the government’s determination to place growth on a firmer footing to meet this year’s 5% growth target”, economists at Singapore bank DBS said in a note.

On 26 September, the Politburo of the Communist Party of China held an unscheduled meeting to announce additional fiscal and consumer-focused support measures.

According to a meeting memo, Beijing aims to boost spending and cut interest rates, increase income for low- and middle-income groups and revitalize capital markets.

The Politburo also pledged to stabilize the country’s property market, preventing further decline, and for the first time, has vowed to strictly limit new commodity residential construction and optimize existing housing inventory.

“We continue to believe that securing the delivery of pre-sold but unfinished homes with direct funding from the central government is the only possible way to revive the country’s declining property sector,” Japan’s Nomura Global Markets Research said in a note.

To boost the capital market, China’s political leaders pledged vigorously guide medium- and long-term funds to enter the market, and clear the bottlenecks of social security funds, insurance, wealth management and other funds entering the market.

FINANCIAL MARKETS CHEER ECON MEASURES
The multifaceted plan has yielded immediate results, with the China’s benchmark CSI 300 benchmark surging by more than 15% in the week ended 27 September, its biggest weekly gain since 2008.

The index tracks the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

At the close of trade on 27 September, the Shanghai Composite Index settled at 3,087.53, up by 2.88% from the previous session, while the Shenzhen Composite jumped 6.05% to close at 1,737.56.

Shares of major chemical producers such as Hengli Petrochemical, Satellite Chemical, and Rongsheng Petrochemical have rallied with double-digit gains over the past four sessions, mirroring the broader market rally.

Analysts, however, cautioned that the market euphoria may be short-lived as longstanding investor worries over China’s structural and balance sheet challenges, including a heavy local debt burden, an aging population, deflation, and eroding confidence, will not be easily reversed.

“After years of stimulus cries, this week actually matters to equities – as evidenced by the initial boost to Chinese stocks, which should continue into Q4,” said Shehzad Qazi, managing director of research firm China Beige Book International.

“Beijing has strongly implied it’s establishing a short-term put, though the mechanisms mentioned this week (borrowing facilities for stocks, market stabilization fund, etc) are not yet operational, and some may never be.”

While the slew of new measures will boost confidence to some extent, these monetary and financial policies alone are enough to arrest the worsening economic slowdown, according to Nomura analysts.

“In our view, the size of incremental stimulus might be less than 3% GDP per year, and markets should place more emphasis on the specifics of any stimulus package,” they said.

“If not designed well, a stimulus program, even if seemingly large, could have a slow and limited impact on growth.”

AUGUST DATA DOWNBEAT
The latest set of stimulus measures are likely in response to further deterioration in China’s macroeconomic data in August, but these may not be sufficient to reverse the downturn in China’s property market, according to Singapore’s UOB Global Economics & Markets Research.

Industrial growth in the country slowed in August to 4.5% year on year compared with a 5.1% pace set in July, due to contraction in heavy industries such as steel and cement.

Robust electronics production and a surge in exports offer a short-term boost, although protectionist measures from other countries threaten future growth.

Industrial profits swung back to a sharp contraction in August, slumping by 17.8% year on year, marking the first contraction since March.

In the services sector, which depends largely on domestic demand, activity also lost momentum, with growth slowing to 4.6% year on year in August, bringing the eight-month average expansion to 4.9%. Household consumption and private investment remain depressed.

The crisis in the property sector continues, and the support measures implemented last spring (around March-May 2023) have failed to stimulate housing demand. Most property developers are still facing major solvency or liquidity problems.

” While market sentiment was lifted by the stronger-than-expected measures, skepticism has remained on any lasting impact on China’s growth or the property market,” UOB economist Ho Woei Chen said.

“PBoC’s re-lending programme has faced a slow take-up due to the poor potential returns and weak buying sentiment while developers continue to face funding risks,” Ho said.

“It is thus important for authorities to implement stronger measures to accelerate the reduction of supply glut,” she added.

Deteriorating conditions on the labour market are adding to the property crisis, which is significantly impacting household morale and spending, said Christine Peltier, economist at French bank BNP Paribas.

Growth in retail sales slowed again in August to just a 2.1% year-on-year increase.

“Deflationary pressures are also persisting due to weak domestic demand and production overcapacities, falling property prices, slower wage growth and declining global commodity prices,” Peltier said.

In August, China’s consumer price index rose by 0.6% year on year, but core inflation hit a low of 0.3%, and the production price index fell for the 23rd consecutive month.

China’s official manufacturing purchasing managers’ index (PMI) remained in contraction mode for the fifth month in September, although the number inched up to 49.8 from 49.1 in August.

Insight article by Nurluqman Suratman

Thumbnail photo shows a container terminal in Taicang, Suzhou Port in China (Source: Costfoto/NurPhoto/Shutterstock)