(Bloomberg) — Since President Xi Jinping sought to draw a line under China’s slowdown last month, investors have called on him to back monetary easing with a strong fiscal stimulus to help one of the country’s biggest stock rallies in years stir up.
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But anyone hoping to get an answer on Tuesday was disappointed. The National Development and Reform Commission, China’s economic planning agency, used the government’s first briefing after a weeklong national holiday to announce that a paltry 200 billion yuan ($28 billion) in spending would be advanced starting next year, after analysts predicted a $28 billion budget package. as much as 3 trillion yuan in the pipeline.
After rising almost 11% at the open, Chinese shares lost almost half their gains. Hong Kong shares had their worst day since 2008, falling almost 10%.
“I don’t know what the NDRC chair was thinking about this,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA. “Frankly, the longer they wait to get clarity, the worse it could be, because people will realize that there is no fiscal side to this stimulus – that it’s all a monetary issue, supporting stock markets and so on. And that is quite dangerous.”
The market reaction showed a mismatch between stock investors and officials in Beijing, who expressed confidence on Tuesday that they would achieve an economic growth target of “about 5%” this year. The question now is whether Beijing will stop short of achieving that goal, or do more to pull China out of the deflationary spiral that threatens more economic pain in the coming years.
There may be more measures to come from Xi. The Treasury Department, which is normally tasked with issuing bonds to finance stimulus and additional spending, is expected to hold a briefing soon that could deliver the kind of stimulus markets are craving. Banks including Morgan Stanley and HSBC Holdings Plc expect 2 trillion yuan in stimulus, while Citigroup Inc. estimates the amount at 3 trillion yuan.
“Policymakers probably don’t feel much pressure to do more yet,” said Christopher Beddor, deputy China Research Director at Gavekal Dragonomics, referring to the market rally since late September. “But if markets fall on no news in the coming days, they will feel compelled to do more.”
What Bloomberg Economics says…
“The focus on growth is clear, reflected in the NDRC’s commitment to the 5% target and the promise to intensify countercyclical measures. But the NDRC has not provided specific figures on what stimulus measures are in the works – other than a plan to try to advance some of 200 billion yuan in investments planned for 2025 into this year.”
—Chang Shu, Eric Zhu and David Qu
Read the full note here.
Tuesday’s briefing was in stark contrast to that of the People’s Bank of China on September 24, when central bank Governor Pan Gongsheng and other top financial officials unveiled a barrage of measures, including interest rate cuts, more money for banks, bigger incentives to purchase homes and plans to consider an equity stabilization fund. Since then, China’s benchmark CSI 300 Index has risen more than 30%.
Traders are now reassessing their positions after the NDRC essentially poured cold water on that world-defining stock rally.
“The ball is in Beijing’s court” to prove its desire to fully restore confidence, said Xin-Yao Ng, investment director at abrdn Asia Ltd. a stimulus of 10 trillion yuan or more will allow the market to recover.”
The NDRC, which detailed Beijing’s historic 4 trillion yuan in infrastructure spending in 2008, said on Tuesday it would accelerate spending while largely reiterating plans to boost investment and direct support for low-income groups and new graduates. , plans already announced before the holidays.
The NDRC officials added that China would continue issuing ultra-long government bonds next year to support major projects. It would make an investment of 100 billion yuan in key strategic areas and accelerate work on projects worth another 100 billion yuan, but those were funds originally budgeted for 2025.
A key question now is whether authorities are happy with meeting the GDP target or whether they want to support the real estate sector, said Larry Hu, head of China economics at Macquarie Group. Adding a trillion yuan in special bonds is enough to meet the growth target, he said, “but it is far from enough if the goal is to stabilize the real estate market.”
“I will now give them the benefit of the doubt, given the supportive tone of the Politburo meeting,” Hu said. “But the moment of truth will come, and the housing market is the most important thing to watch. If the target is only 5%, the real estate market will continue to weaken, meaning investors are now expecting too much stimulus.”
Beijing’s more conservative fiscal stance may reflect concerns about its debt burden. But economists have argued that weak government stimulus during a real estate recession was a major cause of sluggish demand and deflation.
Top leaders have pledged in recent weeks to strengthen fiscal policy, but Beijing wants to balance that commitment with managing the risks of debt-ridden local authorities as the real estate sector’s slump hurts their ability to generate cash.
The Communist Party also remains reluctant to stimulate consumption with measures such as handing out cash to a large part of the population, preferring so far to target smaller groups of the population.
“We see limited opportunity for meaningful demand stimulus in the near term, especially one focused on consumers,” Robin Xing and Morgan Stanley analysts wrote in a note on Tuesday. “Foreign investors could adopt a ‘don’t trust, verify’ approach, evaluating Beijing’s commitment to reflation.”
–With help from Rebecca Choong Wilkins, Colum Murphy, Tania Chen, Charlotte Yang, April Ma, and James Mayger.
(Updates with details of the stock drop in the third paragraph. An earlier version corrected the spelling of abrdn in the 10th paragraph.)
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