In the wake of waning economic growth momentum in China, the recent series of stimulus measures announced by the Chinese Communist Party has led to a significant surge in the Chinese stock market. However, both official and Caixin Manufacturing Purchasing Managers’ Index (PMI) for September have shown significant contraction in demand. Analysts believe that these stimulus policies may not be sustainable and that reviving the Chinese economy requires structural changes in consumption and investment, which the CCP leader is unlikely to easily relinquish.
Last week, the Chinese government implemented a three-pronged approach to boost the economy, including reserve requirement ratio cuts, interest rate reductions, and lowering the loan interest rates for existing homeowners. Additionally, a political bureau meeting pledged unspecified “fiscal” measures.
At a political bureau meeting convened last Thursday, the Chinese Communist Party admitted that the Chinese economy is facing many “new problems” and vowed to introduce new fiscal policies to stimulate economic growth. The meeting also emphasized the need to curb the continuous decline in the real estate sector and achieve the goal of “stabilizing the market.”
On the day of the meeting, a Reuters exclusive report cited sources stating that the Chinese Ministry of Finance plans to issue 2 trillion yuan of special sovereign bonds, with 1 trillion earmarked for providing subsidies for upgrading consumer goods, large commercial equipment, and offering a monthly subsidy of 800 yuan per child for families with two or more children.
Under the impetus of these policy stimuli, the Chinese stock market witnessed a rare rebound. However, other newly released data reflects the ongoing weakness in the Chinese economy.
On Monday (September 30th), both official and Caixin Manufacturing PMI for September were announced at 49.8 and 49.3, respectively. The latter marked the lowest since August 2023, with both indices indicating a significant contraction in demand.
Additionally, data released by the China National Bureau of Statistics last Friday (September 27) showed that profits of large industrial enterprises in August plummeted by a staggering 17.8% year-on-year, marking the largest decline so far this year and reversing the uptrend of the previous four months.
On Monday, the Shanghai Composite Index rose by 8.1% to reach 3,300 points, while the Shenzhen Component Index surged by over 10%, surpassing the 10,000-point psychological threshold. The total trading volume on the Shanghai and Shenzhen stock exchanges increased by nearly 80% from the previous Friday to approximately 2.59 trillion yuan.
However, during the same period, Netease Finance reported that from September 22 to September 28, 146 A-share listed companies disclosed a total of 280 reduction announcements. Additionally, some shareholders of listed companies completed reductions during the A-share skyrocketing period.
The Wall Street Journal suggested that compared to Americans, Chinese households invest significantly less in the stock market, preferring to channel their funds into the real estate market or saving. The article posited that if the stock market to some extent reflects broader emotional indicators, the CCP’s stock market boosting policies may diminish the market’s informational value in reflecting sentiments.
According to Reuters, the massive fiscal policy measures aimed at stimulating consumption by the CCP could potentially raise China’s economic growth rate to around 5% this year, but this is unlikely to alter the long-term outlook significantly.
Michael Pettis, a senior researcher at Carnegie China, stated that the latest fiscal measures are “not actually part of a real structural rebalancing.” He emphasized that rebalancing requires a shift in economic models, which would overturn decades of implicit and explicit transfers of household subsidies to investment and production.
Juan Orts, a China economist at Fathom Consulting, expressed that the “correct” way to transition the economy towards consumption is to cease using household funds to subsidize manufacturing firms.
Orts added, “This would lead to the contraction of the manufacturing sector, triggering a sharp decline in investment, subsequently leading to an economic recession.”
The current socio-economic policy framework in China supports investment rather than consumption. China imposes a 25% corporate tax rate, lower than India’s 30% and the United States’ 37%, yet it ranks among the highest in individual income tax, with a top rate of 45%.
Enterprises in China’s strategic industries frequently benefit from tax exemptions and other incentives granted by the central and local governments. Strategic industries, which Beijing terms as “new qualitative productivity,” such as electric vehicles, green energy, or robotics technology, are considered crucial technological advancements for national security by the CCP.
The article highlighted that many economists believe China’s growth model since the 1980s, which heavily relies on real estate, infrastructure, and industrial investments, has come at the expense of consumers’ benefits.
Economists state that this model has led to overcapacity in infrastructure and manufacturing, resulting in a surge in debt and unsustainable conditions since the global financial crisis as investment returns diminish.
In analyzing the current state of the Chinese real estate market, Lu Ting, Chief China Economist at Nomura Securities, stated that the number of “unfinished sales” by developers outscales “unsold completed units” by a factor of 20. The policy of “completed housing,” aiming to liquidate inventories, should take precedence over the government’s current strategy of buying completed units.
Carnegie’s Pettis further remarked that the central government may be able to sustain fiscal transfer payments for a few more years but without transitioning the growth model, imbalances will continue to worsen, potentially causing problems similar to those faced today without a clean central government balance sheet to manage potential chaos.
The Wall Street Journal noted that China requires substantial economic reforms, such as strengthening healthcare systems, for consumption to genuinely drive the economy.
The article pointed out that many economists argue that enhancing the role of consumption in China’s investment-intensive economy will set it on a more sustainable growth path. However, achieving this necessitates significant economic reforms, like expanding the roles of healthcare and social security.
Nevertheless, it is challenging to believe that Xi Jinping would restart the reform he canceled for the so-called “common prosperity.” Xi Jinping’s most apparent actions in promoting the “common prosperity” initiative involve cracking down on the private sector and wealthy elites.
Moreover, Xi Jinping views Western-style “welfarism” as incompatible with his goal of technological superiority.