China Officials Vow They Have Economy's Back — but Still Don't Say How — Barrons.com
2024-12-13
Category: economic

By Reshma Kapadia
After a bout of optimism earlier in the week that Chinese officials would offer more concrete plans to steady the economy, a readout from China's annual Central Economic Work Conference left investors wanting.
The readout from the meeting — which sets China's economic policy stance for the following year — offered another round of strong language about helping the economy but lacked detail on any plans. Chinese stocks returned about half of the gains logged on Monday in anticipation of bigger stimulus, and were roughly flat on Thursday, with the iShares MSCI China up just 0.05% to $48.87.
Investors may not get much in the way of details about significant policy or stimulus moves until March, when the National People's Congress meets. But strategists expect Beijing to keep up its vocal support for the economy.
"The economy has reached a point where Beijing has arrived at a whatever it takes moment to stabilize economic activity," says Rory Green, head of Asia research at GlobalData TS Lombard, in a briefing Thursday. "Stimulus is coming and it will be sufficient to stabilize growth."
Behind his conviction that aid is on its way is the U-turn in messaging from top leaders about the economy in the last couple months. Further evidence includes efforts to put a floor under the domestic stock market by setting up vehicles for companies to buy stock, and the increase in social protests, which have hit their highest point in the last three years.
The social unrest is a major one for Chinese leader Xi Jinping.
"That is probably the biggest weight in the policy reactionary function, " Green said.
While the stimulus won't solve China's longer-term structural problems, Green expects it to help China achieve 4.5% growth next year. Green sees the economy hitting a cyclical bottom amid easier monetary policy; support for infrastructure, property, and consumption; and bank recapitalizations to facilitate more lending.
But there are limits to what Beijing can do in terms of cutting rates, writes Barclays economist Jian Chang in a note to clients. The scope of rate cuts is limited by its impact on the yuan — with a steep devaluation raising the risk of financial turmoil.
Meanwhile, the Federal Reserve has shifted away from rate hikes and the dollar is expected to strengthen as Trump rolls out his policies creating its own pressure on the yuan.
If Trump follows through on tariffs, economists expect Beijing to go bigger with stimulus. But the details are unlikely to come much before the National People's Congress in March.
Chang expects policy to be more incremental and reactive, rather than pre-emptive and "bazooka." That could change, however, if there is a disorderly selloff in the equity market, a deeper contraction in the property market, or Trump goes big with tariffs, she adds.
Long-term investor Jitania Kandhari, head of macroeconomic research on Emerging Markets Equity at Morgan Stanley, has low expectations. Since the global financial crisis, Kandhari says China has implemented five rounds of big stimulus — with the market running up on average 30% to 40% after each before returning those gains.
Kandhari is less underweight than she was two years ago in China, but is still skeptical, even in the near-term, as China has essentially just moved the debt around its financial system and done little to create the social safety nets that could entice households to dip into their savings.
If China restructured the debt hampering local governments — either with land sales or with steps to recapitalize banks — Kandhari tells Barron's she would become more constructive. In September, officials mentioned some of these steps — a first, she says.
"If they follow through, this market can do OK because it's cheap and that would create a clearing mechanism [for the bad debt], which would be a positive," she says.
Investors for now are waiting to see what Beijing comes up with but if officials fail to deliver in a big way in March the recent wariness about China among institutional investors is only likely to intensify, Kandhari says.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
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