China’s Sweeping Stimulus Package Buys Economy Time, But Won’t End Slump

First he took a sip of tea to gather his composure. Then Chinese central banker Pan Gongsheng unleashed one of the country’s most daring policy campaigns in decades.

In what amounts to a massive adrenaline shot for an economy on the cusp of a deflationary spiral, the governor of the People’s Bank of China and other top financial officials unveiled a series of easing measures that market watchers had wanted for weeks at a rare, high-level press conference on Tuesday in Beijing. They include interest rate cuts, more cash for banks, bigger incentives to buy homes and plans to consider a stock stabilization fund.

Markets on the mainland and in Hong Kong soared, with the CSI 300 Index — a benchmark of onshore Chinese stocks — posting its biggest gain since July 2020. US equity futures advanced and European stocks climbed on the back of sectors with heavy exposure to China, including manufacturers of automobiles and luxury goods.

The market reaction to the policy blitz suggests that Pan, a technocrat who spent time at Harvard and Cambridge, has bought the Chinese economy some precious time. Yet economists believe this is just a down payment if President Xi Jinping is going to pull the roughly $18 trillion economy out of a protracted slump marked by a property market blowout, consumer price weakness and rising global trade tensions.

“I don’t think it’s enough to address the underlying issues behind China’s movement towards the deflationary spiral,” said Duncan Wrigley, chief China economist with Pantheon Macroeconomics. What China needs, he added, is “a package of reforms to fundamentally reconfigure the economy and unleash consumption growth.”

Tuesday’s briefing, hastily arranged only 48 hours earlier, came after weeks of growing anxiety among top leaders in Xi’s government, according to people familiar with the situation. Senior policy makers held several unscheduled closed-door meetings to discuss the economy, as it became increasingly clear that this year’s growth target was slipping out of reach, the people added.

Of particular concern were warnings from officials in at least one major coastal province, an important contributor to growth, that it would struggle to hit the gross domestic product target, one of the people said.

The swift turnaround from top Communist Party leaders came as a surprise to many officials, who had waited for months to hear any feedback on policy proposals they had drawn up to revive the economy. Last week they suddenly received requests for more information, forcing some to pull all-nighters ahead of Tuesday’s briefing, according to regulatory officials who asked not to be identified discussing private matters.

The work appeared to pay off. Pan and other officials have changed the narrative around China’s economy for the moment. That’s a big shift: In recent weeks, banks from Goldman Sachs Group Inc. to UBS Group AG cut their forecasts for China’s economic growth following a slew of bad data that raised alarms about falling prices.

Bloomberg Economics and others now expect the government to hit Xi’s goal of expanding GDP by “around 5%” this year. But most economists also agree that more is needed to avoid entrenched Japan-style deflation. The big missing piece remains a coherent strategy to get China’s 1.4 billion people to ramp up spending.

“A lot of China’s issues are demand- or confidence-driven,” said Nigel Peh, a portfolio manager at Timefolio Asset Management Co. “Overall, I don’t think the measures can move the needle as China’s problems are complex. And there’s no silver bullet.”

With the central bank surprising the market by doing more than expected, the spotlight now is on the Ministry of Finance. More fiscal measures could come in the next few days as Xi’s 24-member Politburo is set to meet ahead of a weeklong annual holiday starting Tuesday. The event will mark the 75th anniversary since the Communist Party founded the People’s Republic of China.

Despite facing pressure from the US and elsewhere to stimulate consumption and rebalance the economy away from manufacturing, leaders in Beijing would prefer to avoid giving cash payments to people. Handouts are a common policy prescription to boost demand in various countries, but China worries about creating a welfare state it can’t afford — and in a nation with one of the world’s highest savings rates, officials doubt that most people would spend the money in any case.

That has the market pinning hopes on more funding to buy up unsold homes, greater spending on social welfare and further moves to help consumers trade in old appliances. The Finance Ministry can also push local governments to sell more bonds to ramp up spending on infrastructure.

A debate is also emerging within China about whether to break away from unwritten rules to keep its fiscal deficit at about or less than 3% of GDP and maintain its sovereign debt-to-GDP ratio below 60%. The government should “significantly boost” fiscal spending to pay for education, medical care and social security, according to Xu Qiyuan, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. The think tank is affiliated with the State Council, China’s equivalent of the US cabinet.

“While expansionary policies come with side effects, a lesson we should learn from Japan is the side effects would be even worse if expansionary policies are not taken or delayed,” Xu said. “China should not be bound by outdated fiscal doctrines in the US and Europe.”

Officials in Beijing want any fiscal measures to spur more confidence in the private sector. But Xi’s government has taken a host of steps over the past several years that have done exactly the opposite, including cracking down on tech giants like Alibaba Group Holding Ltd. and denouncing the “hedonistic” lifestyles of finance workers.

Read more: Xi Unleashes a Crisis for Millions of China’s Best-Paid Workers

At least three top investment bankers from different securities firms have been detained in recent months, along with five current and former employees of British drug maker AstraZeneca Plc. Concerns over the safety of executives, increased US-China tensions and an economy hampered by its troubled property sector are keeping foreign investors away.

“It feels like we are a long way away from actually investing” in China’s property market, said Hamish MacDonald, head and chief investment officer of Asia-Pacific real estate at BlackRock Inc., when asked about the impact of the stimulus.

“I want to see offshore capital focusing on it, and I want to see domestic capital also buying,” he said. “At the moment there’s not a lot of buyers in either of those two categories.”

At Tuesday’s briefing, Pan and other officials stuck firmly to monetary policy. And there was no mention of “deflation,” a term that Chinese authorities have sought to censor.

Still, the fact that the PBOC governor held a live televised briefing to announce big monetary policy moves, provide some forward guidance and take questions from reporters represents a sea change in how China operates.

Under past governors, the PBOC typically announced major monetary policy decisions in statements published on its website. Sometimes an accompanying release would give some background information, attributed to an unnamed “relevant official.”

To some investors, the transparency shown on Tuesday indicated Beijing’s urgency to stem a rout that has wiped out more than $6 trillion from the market value of Chinese and Hong Kong stocks since their 2021 peak.

“What surprised the market is the clear direction and funding from the PBOC in being a firm liquidity resort to prop up the stock market,” said Linda Lam, head of equity advisory for North Asia at Union Bancaire Privee in Hong Kong.

“Chinese capital markets should enjoy a sweet liquidity honeymoon period,” she added. “China is buying time to fix more deep-seated growth problems.”