In China’s stock market, after a roller-coaster week of fluctuations, the press conference held by the Ministry of Finance of the Chinese Communist Party on Saturday (October 12) failed to provide detailed information on the large-scale new stimulus plan that investors were eagerly anticipating. Foreign investors were not reassured by this gesture.
Market insiders and analysts believe that the fiscal policy measures announced by Beijing are mainly focused on debt resolution, aiming to prevent risks and stabilize the economy, rather than directly stimulating consumption. Due to the different goals, this will inevitably determine the scale and scope of the subsequent policy implementation or debt issuance. They expressed that the market is unlikely to be excited about this official news.
During Saturday’s press conference, the Ministry of Finance of the Chinese Communist Party touched upon several challenging issues facing the Chinese economy, such as the increasingly heavy debt burden of local governments, concerns about bank capital levels, and the dilemma in the Chinese real estate market, but did not provide any specific details on how to address them.
“Maintaining stability remains the main theme of this press conference, but the key lies in the execution,” commented one investor. He warned that the policies of the Chinese Communist Party are known for changing swiftly.
At the beginning of this week, as expectations for a large-scale stimulus package rose, the Chinese stock market surged significantly. However, after the National Development and Reform Commission of the Chinese state did not announce any details on the scale and scope of government measures at a press conference on the 8th, the market experienced a sharp decline.
Subsequently, the Ministry of Finance announced that they would hold a press conference on Saturday, once again raising investors’ expectations. Despite this, both the Chinese and Hong Kong stock markets saw substantial declines this week.
The Wall Street Journal reported that the Ministry of Finance’s press conference on Saturday only outlined the plan without providing an overall figure, effectively bringing investors back to the state they were in earlier in the week.
Following the press conference in Beijing, Alicia García-Herrero, Chief Asia-Pacific Economist of Natixis, expressed on social media that it is difficult to understand why stronger actions were not taken or more clear spending plans were not outlined.
“I don’t think this will significantly boost the market,” she said.
Heron Lim, an economist at Moody’s Analytics, told the Financial Times that without data on central government stimulus plans, investors may “step back until they are fully sure of the direction of fiscal support.”
American investor Andrea Lisi mentioned on social media that the ambiguity of the Ministry of Finance’s press conference may lead to more selling than buying.
“Chinese policymakers do not understand that to initiate sustainable economic growth, they must give Chinese consumers the ability to buy more products,” Lisi wrote.
He suggested temporarily avoiding chasing this wave of enthusiasm in the Chinese stock market and reducing the proportion of Chinese stocks in emerging market ETFs.
Economists estimate that China needs an additional 10 trillion yuan in stimulus measures within two years to boost the economy and ensure that most funds are used by households to support domestic demand.
The Ministry of Finance promised to substantially increase the debt limit once to replace the hidden debts of local governments, which were left behind after local governments heavily spent on infrastructure projects using off-balance sheet financing tools. However, Finance Minister Fan Lifa did not disclose the size of the limit, only stating that it is the “most significant measure to support debt reduction introduced in recent years.”
Some analysts believe that Fan Lifa’s statement implies that the constraints on local government finances will return with increased strength to the central government, which will enhance control and fiscal discipline over local governments.
Fan Lifa reported to the Standing Committee of the National People’s Congress on September 10 that by the end of 2023, the legal debt balance of local governments was 41 trillion yuan, 37% higher than that of the central government.
However, economists estimate that the scale of hidden debts of the Chinese local governments is between 49 trillion and 78 trillion yuan, approximately twice the size of central government debts. Some estimates suggest that up to 57 trillion yuan of local debts face a higher risk of default.
In addition, Deputy Minister Liao Min of the Ministry of Finance announced at the Saturday press conference that special national bonds will be issued to support large commercial banks in China to replenish their capital. However, Liao Min did not disclose specific figures on the issuance size that investors were closely watching.
Mohamed A. El-Erian, former Chief Economic Adviser of Allianz Group, stated that the measures announced by the Ministry of Finance on Saturday were taken under pressure from the government to take more measures to deleverage the excessive debt, advance necessary structural reforms, and stimulate household consumption and corporate investment.
“Analysts need more details about the expected government actions— including scale, content, and schedule—to have the confidence to judge whether this constitutes the desired ‘policy bazooka’ that many hoped for,” El-Erian wrote. He is currently the Master of King’s College, Cambridge University.
He previously pointed out in Bloomberg that the measures taken by the Chinese government are a safety net, not a bazooka. These policies are aimed at containing the risks of severe economic slowdown, rather than implementing large-scale stimulus measures to boost consumer confidence and pull the economy out of its rut.
According to his observations, China faces severe imbalances in its real estate sector and local governments, requiring a cautious and patient approach to deleveraging and reform.
“If this does not happen, the bazooka could exacerbate over-leveraging in some regions, worsen excessive debt, and further disrupt the effective allocation of resources in the entire economy,” he warned.
El-Erian cautioned investors that there are two key points to understand about investing in China: first, China (the Communist Party) cannot solve micro issues with macro tools; second, the necessary micro tools require time to develop and have an impact.
“Without these two points, investors will be disappointed—either the bazooka will never materialize or, even if it does, it will exacerbate structural and financial imbalances,” El-Erian reminded, “In the past few months, it was these imbalances that led investors to believe that China was not a suitable investment destination.”