Where is China’s stimulus?

A raft of economic data last week again confirmed mixed signs for the post zero-covid recovery for China.

The headline act was GDP. China’s economy in the second quarter grew 6.3% on a year ago. It may sound like a strong number, but we’re comparing it against the second quarter a year ago when Shanghai was in the middle of zero-covid lockdowns.

A softening in the quarterly GDP growth from 2.2% in the March quarter to 0.8% in the June quarter also suggests a loss in momentum. Indeed, quarterly growth would equate to an annualized 3.2%, although I would caution against treating China’s GDP statistics the same as you would in advanced economies.

Still, the loss of momentum in the economy does raise some doubt that China could meet its 5% growth target without more support – and recall that this target was viewed as being conservative in the first place.

For many years, when China’s economic growth faltered, the government has stepped in to pump up the economy, especially if its growth target comes into question.

So, the loss of momentum in China’s economy raises the question, where is the stimulus?

Truth be told, there HAS been some stimulus recently announced on top of reductions in various interest rates last month. These include a “31-point action plan” to support private sector businesses and 11 measures to boost household spending announced by the commerce ministry last week.

But these measures lacked detail and specifics on how large, which explains why media and financial markets have paid little attention. Indeed, more than at any other time in the past couple of decades, there are doubts that Chinese authorities will deliver the same kind of stimulus as it has done in the past to ensure that whatever economic growth target is reached.

Along with the lack of concrete, big-scale measures, there are growing signs that China has reached the limits of the big infrastructure spending of the past given the debt concerns of certain local governments. Moreover, there has been a major reluctance to provide large-scale stimulus to consumers, as has been done in advanced economies to revive economies.

It leaves authorities with three key possibilities with regard to further stimulus:

1) Continue stimulus in trickles: There is still room for further stimulus through lower interest rates and increasing liquidity. There could also be greater support for businesses and industries and to stabilise the housing sector. This kind of stimulus would be a continuation of what authorities have done over the past few months. However, it may not result in the confidence boost necessary, and it might mean that the growth target set for this year is at risk of not being met.

2) Push the envelope and allow further infrastructure spending: Infrastructure spending is the old playbook for stimulus and has been a tried and tested way to reach GDP targets, of the past few decades. However, recent signs that local governments are facing financial stresses (including Guizhou earlier this year) suggests that it may not even be possible and might lead to further trouble re-financing and servicing current debt burdens.

3) Launch large-scale stimulus for households: Finally, one option, and probably the most favourable in delivering tangible benefits to China’s economy is to deliver a large amount of direct stimulus to households. However, the major hurdle to this scheme is the long-running reluctance by the central government to directly support consumers. Whether it is the notion of incentivising ‘hard work’ or prioritising policies to support industries, large-scale direct support to consumers has been low down the priority list.

So, either the growth target could at risk, or there is some sort of stimulus is in the works.

Regardless of the hurdles for large stimulus, the GDP growth target is important for the CCP to meet.

And there are some other signs that we could see a larger package. Specifically, we could see larger scale stimulus be announced after the July Politburo meeting, where China’s top officials will meet. State media have increasingly been reporting the need to step up stimulus, supported by think tanks and advisors. Discussion within the party mouthpieces have been good signals in the past of what might be ahead, and that some sort of package is being thought out. Encouragingly, that discussion has also included proposals for much greater consumer support, suggesting that policy debates may have shifted since earlier this year.

But if financial markets were hoping for large-scale infrastructure spending, as in the past, which has boosted commodity demand over recent decades, they are likely to be disappointed. Indeed, even just to maintain current levels of infrastructure spending is a huge, huge amount. Not only do there seem to be limits in the ability for local governments to even obtain more debt, there also appears to be less vocal support for this kind of stimulus.

So, there does seem to be a good reason to expect that a larger stimulus is on its way, and that it would take the form of something different than in the recent past. The question is how large? We would need to see a package of at least a trillion yuan to consumers to likely have a meaningful impact to boost confidence. Let’s wait and see.