Sure, Wall Street. Forward. Ride the dragon.
There was a moment of grace Tuesday for investors, market analysts and finance top brass when Beijing announced measures to try to revitalize 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 creating a fund designed to stabilize stocks and announced rules that would allow Chinese banks to hold less money in reserves, freeing up 1 trillion yuan to come out as loans. They also reduced the People’s Bank of China’s medium-term lending rate and key interest rates for banks and customers. Homebuyers can also now put less money down on their purchases, in a bid to breathe life into China’s moribund property market.
Wall Street’s immediate reaction was complete jubilation. Since the pandemic, China’s leader Xi Jinping has done little to stop the hemorrhaging in the country’s housing market or to get China’s ailing consumers to start spending money again. The Shanghai Composite lost almost a quarter of its value. American companies in China are being crushed. Foreign investors are moving record amounts of money out of the country. This week’s announcements sent Wall Street into a state of ecstasy, with hopes that the Chinese Communist Party is now, as in years past, prepared to take a falling knife. The Golden Dragon Index (a collection of Nasdaq-listed companies that do most of their business in China) rose 9% following the announcements. Financial news commentators heralded this as a clear signal from Beijing that authorities were being realistic about halting China’s descent into a deflationary depression. There would be more mergers and acquisitions! Lower rates could mean more private equity activity! Beijing’s famous “bazooka” could finally be on its way!
But honey, they are an illusion.
Xi’s Beijing lacks the will and power to change China’s economy. At the heart of their problems is a lack of consumer demand and a housing market that is undergoing a deep and slow correction. Xi is ideologically opposed to boosting consumer spending with direct stimulus checks. Without will. On the energy front, Goldman Sachs estimated that returning China’s apartment inventory to 2018 levels would require 7.7 trillion yuan. China’s real estate market is so overdeveloped and indebted that the trillions in stimulus needed to fix the problem (and make the local governments that funded it whole again) would make even a rapacious fundraiser like the CEO of OpenAI blush. , Sam Altman. The “stimulus” offered by the Chinese authorities is a drop of water, and they know it. Wall Street should too. But I guess they haven’t learned.
The measures announced by the CCP are aimed at making it easier for Chinese people to access capital and buy property, but access to debt is not the issue here. People in the country don’t want to spend money because they already have large amounts of real estate debt tied to failing properties. Seventy percent of Chinese household wealth is invested in property, which is a problem as Société Generalé analysts found that house prices have fallen by up to 30% in Tier 1 cities from their peak. 2021. Land purchases helped finance local governments so they could spend on schools, hospitals and other social services, now that the financing mechanism is out of control. Falling prices in these sectors, or what economists call deflation, has spread to the broader economy. The latest report on consumer price inflation showed prices rose just 0.3% in August compared with a year earlier, the lowest price growth in three years, raising concerns that deflation was taking hold. take root, spread to wages and eliminate jobs.
In this context, many Chinese are not willing to spend. Consumers are opting for cheaper products and retail sales in the second quarter grew only 2.7% from a year earlier. In a recent note to clients, business studio China Beige Book said corporate debt had barely budged from record lows in 2021, during the worst of the pandemic. Bottom line: It doesn’t matter how cheap and easy it is to access loans if no one wants to apply for one.
“These measures, primarily on the supply side, would certainly be helpful if the problem in China was that production was struggling to keep up with demand growth,” Michael Pettis, a finance professor at the University of Massachusetts, said in a recent report. Peking University and member of the Carnegie Endowment. 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 most direct way to stimulate demand in a deflating economy is to send checks to households. But once again, Xi doesn’t want to do that. The Chinese president is a follower of Austrian economist Friedrich Hayek, who believed that direct stimuli distort markets and lead to uncontrollable inflation. This goes against what economists would recommend for China’s situation, but those who criticize Xi’s way of doing things tend to disappear.
It is clear that Beijing’s recent measures will not solve China’s main economic problems. And Wall Street’s enthusiasm overlooks another key problem: The measures aren’t even that big. Call it a bazooka or a bazooka or whatever, but this stimulus is small compared to what we have seen from the CCP in the past. In 2009, the government allocated 7.6 trillion yuan to save the economy during the global financial crisis. In 2012, it lost $157 billion on infrastructure projects. In 2015, it pumped more than $100 billion into troubled regional banks and devalued its currency to boost flagging exports. The CCP has shown that it is willing to take drastic measures to stabilize the economy. The price of that stock, however, is a huge debt accumulated throughout the financial system, especially in the hands of real estate companies, state-owned companies and local governments. In the past, monetary easing calmed gyrations in the financial system, but growth has never been so slow and debt has never been so high. The problem does not coincide with the price here.
The Chinese Communist Party has a bubble on its hands and does not want to burst much more or see it burst in a spectacular way. Then there is Xi, who seems quite uninterested in restructuring the real estate market. He wants government investment to focus on developing cutting-edge technology and boosting exports to get the economy out of its structural debt problems. But those new revenue streams have not yet materialized for China, and establishing them will take time and resolve trade conflicts, primarily with the United States and the European Union. Let’s consider the easing measures we’re seeing as something of a moment for markets to catch their breath: a respite from what has been a constant stream of bad economic news. But all it is is a respite.
Linette Lopez He is a senior correspondent for Business Insider.
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