Chinese authorities unveiled details of a fiscal stimulus package Friday, in a continued bid to stabilize the world's second-largest economy.
The task has become more urgent now given how the trade war could escalate if President-elect Donald Trump follows through on his proposals to hit China with higher tariffs.
China announced it will raise the ceiling on local government debt by 6 trillion yuan ($840 billion) to replace existing hidden debts, according to a press conference Friday, the Xinhua News Agency reported.
Local governments will also be able to tap another 4 trillion yuan in a new local bond quota over the next five years.
Markets were seemingly not impressed by the measures. Futures on the Hang Seng fell 2.1% after the news Friday, while the iShares China Large-Cap ETF is down 4% in the U.S. premarket. The Hang Seng index had closed 1.1% lower ahead of the announcement.
Beijing had already taken coordinated steps to stabilize its struggling property market, rebuild consumer and business confidence, and revive an economy that has been gripped by deflationary pressures. But the leadership had made it clear that more was on the way
Friday's National People's Congress Standing Committee meeting had initially been scheduled for late October. The meeting was delayed, some analysts said, so that Chinese authorities could get a read on the U.S. election and adjust accordingly.
Expectations about how much spending the government would unleash have increased in recent weeks, rising from about four trillion renminbi ($561 billion) to as much as 14 trillion renminbi. Much of that spending is expected in the form of bond issuance to shore up debt-laden local governments that have struggled as revenue from land sales dried up. Also possible are capital injections into banks to nudge them to lend more: A cushion of some extra money would help banks to deal with nonperforming loans piling up from the property bust.
Chinese stocks soared when authorities initially pledged aid, but the market returned some of those gains. Details have been slow to materialize and some measures have fallen short of expectations.
But now, optimism that Beijing will do more to aid the economy in the wake of Trump's re-election are lifting shares again. The iShares MSCI China exchange-traded fund rose 5.2% to $52.33 on Thursday, though that leaves it well below its October highs.
Beijing spent four trillion renminbi after the 2008-2009 global financial crisis -- a far greater share of its economy than anything currently on the table given that gross domestic product has quadrupled in nominal terms since then. While investors have been hoping for a similar "bazooka" like package, Beijing has been much more incremental this time around, in part because of the mountain of debt it has been trying to chip away at.
Investors may be too optimistic. Gavekal analyst Arthur Kroeber is looking for five million to six million renminbi, along with likely comments from officials that they will do more if needed.
Chinese authorities may hold some of their firepower for the tariff fight analysts widely expect with the U.S. shortly after Trump is sworn in, Kroeber adds.
And with good reason: Exports accounted for 42% of China's economic growth last quarter and a 60% tariff by the U.S. on all Chinese exports could shave two percentage points from growth next year, according to TS Lombard. That is the last thing China needs, given that the measures promised so far are seen as likely to only stabilize growth, rather than revive it.
China is likely to retaliate for any tariff increase, in part by allowing its currency to depreciate to offset the hit. It could also enforce export controls on components or rare earths the U.S. tech sector needs, cut back on its agricultural purchases from the U.S., or make life harder for Tesla CEO Elon Musk, a Trump supporter.
For investors, the stimulus measures may put a floor under Chinese stocks, especially as Beijing is focused on boosting the domestic stock market to revive consumer confidence. But though Beijing may succeed in engineering a higher domestic stock market by allowing banks and others to borrow to invest in the market, Kroeber says that for sustained gains, Beijing needs stronger nominal growth to bolster corporate profits and make equities more attractive. It also would help if Chinese authorities clearly commit to fight the deflation that is taking hold in the domestic economy.
Money managers have been taking advantage of the volatility as a chance to add to their holdings of beaten-up stocks, especially those linked to the consumer, as a way to benefit from any economic improvement.
But Chinese stocks are likely to stay volatile until more clarity emerges on what type of people are staffing another Trump administration. Also uncertain is how the trade war could play out and whether an initial salvo of tariffs could make way for a possible truce, given that Trump sees himself as a dealmaker.
Trump took a similar approach in the first administration. He began by levying tariffs on China and then reached a "Phase One" trade deal in which China agreed to buy a certain amount of U.S. goods, such as soybeans. Although Beijing didn't ultimately didn't fulfill that commitment, the deal cheered markets and created a respite from the trade-war concerns.
One possibility now is that Chinese authorities delay some stimulus spending until a full meeting of the National People's Congress in March. That would allow them to use fiscal spending plans to bolster consumption as a tool in negotiating with Washington. Trump and U.S. officials want China to bolster domestic consumption rather than relying on exports that send a flood of cheap goods to the U.S. to compete with domestic manufacturers stateside.
Investors may need to readjust expectations -- and practice patience.
Comments