Xi Jinping has fired his massive money cannon at the wrong target
Of course, Wall Street moved on. Ride the dragon.
There was a moment of grace for investors, market analysts and finance majors on Tuesday when Beijing announced measures to try to revive China's creaking economy. Pan Gongsheng, governor of the country's central bank, the People's Bank of China, 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 designed to stabilize stocks and announced rules to allow Chinese banks to hold fewer cash reserves, freeing up 1 trillion yuan to bail out. They also cut the People's Bank of China's medium-term lending rate and key interest rates for banks and consumers. Homebuyers can also now pay less on their purchases – an attempt to breathe life into China's moribund property market.
The immediate reaction from Wall Street was all-out jubilation. Since the pandemic, Chinese leader Xi Jinping has done little to stem the bleeding in the country's property market or restart spending on China's ailing consumers. The Shanghai Composite lost nearly a quarter of its value. American companies are getting crushed in China. Foreign investors are withdrawing record amounts of money from the country. This week's announcements sent Wall Street into a state of euphoria, hoping that the Chinese Communist Party is now, as in the past, ready to catch a falling knife. The Golden Dragon index — a collection of Nasdaq-traded companies that do most of their business in China — rose 9% following the announcements. Financial-news talking heads hailed it as a clear sign from Beijing that policymakers are getting real about China's descent into a deflationary funk. There will be more mergers and acquisitions! Lower rates could mean more private-equity activity! Beijing's famous “Bazooka” may finally be on the way!
But honey, they are illusions.
Xi's Beijing lacks the will and energy to turn around China's economy. At the heart of its problem is a lack of consumer demand and a property market undergoing a deep, slow correction. Xi is ideologically opposed to triggering consumer spending through direct stimulus checks. no desire As for capacity, Goldman Sachs estimated that 7.7 trillion yuan would be needed to bring China's apartment inventory back to 2018 levels. China's property market is so overbuilt and indebted that the trillions in stimulus needed to fix the problem — and the local governments that financed it back — would make even a voracious fundraiser like OpenAI CEO Sam Altman blush. The “stimulus” that China's policymakers are providing is down a well, and they know it. So should Wall Street. But I think they haven't learned.
The measures announced by the CCP are intended to make it easier for Chinese people to access capital and buy property, but access to credit is not the issue here. People in the country don't want to spend money because they are already sitting on huge amounts of real estate debt associated with declining properties. Seventy percent of Chinese household wealth is invested in property, which is a problem as analysts at Société Générale see housing prices in Tier 1 cities falling by up to 30% from their peak in 2021. Land purchases helped local governments raise funds to spend on schools, hospitals and other social services — now the financing system is out of whack. Falling prices in this sector, or what economists call inflation, have spread throughout the wider economy. The latest consumer inflation report showed prices rose just 0.3% in August from a year earlier, the slowest price increase in three years, raising concerns that inflation will catch up, spill over into wages and kill jobs.
It is clear that Beijing's recent moves will not solve China's core economic problems.
In that context, many Chinese people are not interested in spending. Consumers are shifting toward lower-priced goods, and second-quarter retail sales rose just 2.7% from a year earlier. In a recent note to clients, business surveyor China Beige Book said business borrowing has barely fallen since hitting an all-time low in 2021 during the height of the pandemic. Bottom line: It doesn't matter how cheap and easy it is to access credit if someone doesn't want to take out a loan.
“Most of these supply-side measures would certainly be helpful if the problem in China was that manufacturing is struggling to keep up with demand growth,” Michael Pettis, a Peking University finance professor and Carnegie Endowment Fellow, said recently. Post on X. “But with weak demand as the main constraint, these measures are more likely to increase trade surpluses than GDP growth.”
The most direct way to increase demand in a deflating economy is to send checks to households. But again, Xi doesn't want to do that. The Chinese president is a follower of the Austrian economist Friedrich Hayek, who believed that direct stimulus distorts markets and leads to uncontrolled inflation. This flies in the face of what economists would recommend for China's situation, but those who criticize the way Xi operates disappear.
It is clear that Beijing's recent moves will not solve China's core economic problems. And Wall Street's excitement misses another key problem: the measures aren't even that big. Call it a bazooka or a blitz or whatever, but this stimulus pales in comparison to what we've seen from the CCP in the past. In 2009, the government pumped in 7.6 trillion yuan to save the economy during the global financial crisis. In 2012, it spent $157 billion on infrastructure projects. In 2015, it injected more than $100 billion into ailing regional banks and devalued its currency to boost flagging exports. The CCP has shown it is willing to take dramatic steps to stabilize the economy. The price of that action, however, is the huge debt created throughout the financial system, especially by property companies, state-owned enterprises and local governments. In the past, monetary easing calmed volatility in the financial system, but growth has never been this slow and debt has never been this high. The problem here is not matching the price tag.
The Chinese Communist Party has a bubble on its hands, and it doesn't want to blow too much or burst in spectacular fashion. Also, there's Xi, who isn't exactly keen on restructuring the property market. He wants government investment to focus on developing the economy beyond its structural debt problem to develop frontier technologies and boost exports. But those new revenue streams for China have yet to materialize, and establishing them will take time and work through trade conflicts, mainly with the United States and the European Union. Consider the easing measures we're seeing as a moment for markets to catch their breath — a respite from a constant stream of bad economic news. But a vacation it all.
Lynette Lopez A senior correspondent for Business Insider.