Reshma Kapadia
China unveiled another tranche of "mini-stimulus" Tuesday as the world's second largest economy continues to see broad-based weakness.
The measures to boost growth come even as China projects strength geopolitically and on the technology front; its artificial-intelligence models continue to close the gap with U.S. frontier labs. But the steps aren't enough to convince Wall Street that Chinese stocks are winners.
Beijing on Tuesday cut interest rates by 25 basis points and offered mortgage interest rate subsidies-as well as targeted support for infrastructure investment, technology companies, and smaller enterprises and rural businesses. It's the latest effort to revive an economy stuck in a multiyear malaise and a property downturn that has hit a major store of wealth for Chinese households. In a note to clients, Pantheon Macro described the move as the largest stimulus in two years, aimed at getting growth back on track to hit Beijing's target of 4.5% to 5% for the year.
The stimulus comes after months of weak data. September economic data tracked by independent research firm China Beige Book International showed softness across the board-major indicators like revenue, profits, and hiring were even weaker than a year ago.
"It isn't just one part of the economy or one part of the country," says Shehzad Qazi, managing director at China Beige Book. Manufacturing saw a slowdown, and corporate borrowing hit one of its weakest points, with the few willing to take on credit reporting weaker sales and profits.
Business confidence is flatlining, and consumers are still wary of spending. They are still scarred by the lockdowns during the Covid-19 pandemic, and the property market hasn't stabilized from a downturn that began in 2021 and wiped away a lot of household wealth. In recent months, investments have slumped-partly because local governments have been skittish about spending amid the fallout from the war in Iran and not wanting to misread what Beijing wants, says Rory Green, head of China research at TS Lombard.
But Chinese officials have clarified they do want local governments to spend; Green says that could help growth steady in the second half of the year. Beijing vowed more targeted stimulus on Monday and unveiled credit and fiscal support Tuesday -an approach it has taken numerous times when the economy has hit a bigger rough patch. But in the past, the boost from those steps hasn't been sustained.
Analysts say Chinese leader Xi Jinping likely won't change his tact toward the economy and make the structural changes that would meaningfully revive Chinese consumers and the economy, such as creating a safety net with healthcare or pension reform.
One reason is the weak domestic situation comes alongside record exports. In addition, Beijing is focused on other national goals-such as expanding market share abroad and dominating the next frontiers of technology. Those aims are underpinning Beijing's continued heavy investment into AI and areas like robotics and quantum.
Xi's meeting last week with President Donald Trump showcased China's growing heft on the geopolitical stage and its continued leverage by dominating the mining and processing of rare-earth minerals.
"There will be periods when consumption spending will be horrible and they will do stopgap measures while they focus on the bigger prize: Gaining a level of supremacy that lets them not just dominate at home but also sell to developed markets," Qazi says, referring to Beijing's efforts to build strong technology-related firms and gain market share selling electric vehicles, clean energy equipment, and other industrial products.
China's continuation of this approach makes life harder for other economies, however, as its exports of advanced manufactured goods threaten the industrial base in places like Europe. The European Union plans to unveil a plan next month to address the issue-possibly through tariffs or efforts to get Beijing to manufacture in Europe if it wants to sell to its consumers.
But even then, analysts note China's products are so competitive that tariffs are unlikely to deter it much. Indeed, China's exports only increased in the wake of the tariffs from the U.S. last year.
China's economy continues to rest on export growth, especially on sales related to artificial intelligence and green energy where Beijing's competitive advantage is large, Green says.
Leon Eidelman, a longtime emerging markets manager at JPMorgan, owns less in China versus peers than he did a while ago. Among his concerns: The government hasn't been able to incentivize consumers to spend their accrued savings and is also beginning to eliminate some companies' tax benefits as it tries to improve its fiscal health.
The other challenge, he says, is the intense competition Chinese companies face broadly, making it difficult for them to generate higher margins even as they take market share globally.
BlackRock strategists have highlighted this as well. In a recent note to clients, they point out examples where Chinese companies dominate the industry but profitability hasn't followed. Auto profits, for example, fell 20% in the first seven months of this year, and solar manufacturers have seen profits collapse.
BlackRock strategists are lukewarm on Chinese stocks-they suggest that investors stick with the pockets able to generate stronger margins and returns, such as in AI hardware or certain areas of advanced manufacturing.
The iShares MSCI China exchange-traded fund is down 12% so far this year, a contrast to the 23% gain in the iShares MSCI Emerging Markets index.
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