Audience friends, hello and welcome to “Qin Peng Observation.”
Today’s focus: China’s economy continues to provide positive news as the Communist Party’s Politburo unusually held an economic work conference in September, with Xi Jinping acknowledging economic difficulties and injecting a boost into the market. There are rumors that the authorities plan to issue 3 trillion special national bonds.
In just a few days, China has transitioned from ICU to partying on the streets of the stock market. While foreign investments remain calm on the sidelines, they still express concerns that the Chinese government’s market support plan may fail if key issues are not addressed.
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On September 24, the Chinese authorities introduced a comprehensive monetary policy package to support the economy, known as the “three arrows.” This includes interest rate cuts, reductions in reserve requirements, injecting 1 trillion yuan of long-term funds, lowering mortgage rates for existing homes, reducing down payment ratios for second homes, and launching an 800 billion yuan first-phase support for the stock market.
However, the market still awaits fiscal policies from the Chinese government. With decreasing returns on traditional infrastructure investments, some researchers are calling for adjustments in fiscal expenditure structure, increased issuance of national bonds, focusing on improving basic public services for migrant workers, raising resident incomes, and substantially expanding domestic demand.
On September 26, the Communist Party’s central Politburo held a meeting, analyzing the current economic situation and outlining the next steps for economic work, chaired by Xi Jinping.
This meeting was unique for four reasons:
Firstly, it was rare for a meeting to be held in September, indicating that the officials in Zhongnanhai can no longer sit still in the face of continued economic downward pressure. Typically, the Communist Party’s Politburo convenes monthly meetings, but when it comes to economic matters, there are usually only three to four meetings per year, with those in late April and late July focusing on economic data for the first quarter and first half of the year, respectively, and the meeting in early December setting the tone for the Central Economic Work Conference at the year’s end. The October meeting of the Central Politburo has traditionally focused more on economic matters, but in recent years there have been changes, including themes such as “modernization of national governance,” evaluating the “13th Five-Year Plan,” summarizing the so-called achievements of the CPC’s centenary, and studying the 20th National Congress spirit, and Northeast revitalization.
The timing is sudden because leading investment banks worldwide have downgraded China’s GDP growth rates for this year, and the actual situation is even worse. Based on tax revenues and the scale of social financing, the actual growth in the first two quarters of this year was only -5%, expected to further drop to -10% in the third quarter.
Secondly, Xi Jinping rarely mentions economic difficulties. In contrast to the previous meetings emphasizing stability, such as the July 30 meeting describing economic performance as “stable with progress,” this Politburo meeting acknowledged “new situations and problems” in China’s current economic operation, calling for a realistic and calm outlook and “facing difficulties with confidence.”
The meeting also emphasized achieving the 5% growth target, a departure from the previous tone of “striving to achieve the 5% target.”
Thirdly, there is an almost 180-degree shift in real estate policies. Especially emphasized is the need to prevent further decline in property prices and stabilize them. This sharp reversal contrasts with Xi Jinping’s previous slogan that “houses are for living, not for speculation.” This also implies that there may be significant policy enhancements in various regions in the fourth quarter of this year.
In 2020, Xi Jinping introduced the “three red lines” for real estate developers and firmly rejected a rescue for Evergrande Group, seen as the last straw dragging down the real estate market. Currently, China’s property market is experiencing simultaneous drops in volume and prices, with national new residential property transactions in August decreasing by 27% year-on-year, a significant increase from July’s 18.5% decline. The inventory turnover period stands at 25.2 months, exceeding the two-year level for seven consecutive months. Third- and fourth-tier cities face greater pressure to clear housing inventory, at around 36 months.
This Politburo meeting explicitly states the need to “stabilize and prevent further drops in the housing market,” planning to increase the issuance of special loans for the “white list,” adjust regional housing purchase restrictions, lower interest rates on existing home loans, unify the minimum down payment ratio for home loans to 15%, and accelerate inventory clearance to stimulate the real estate market.
Currently, only Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin, and Hainan Province still enforce purchase restrictions, with further relaxation expected.
Fourthly, the meeting clearly states policy support for the capital market, highlighting the significance of the capital market in the current policy framework of the Communist Party.
On the evening of September 26, the China Securities Regulatory Commission announced, with the consent of the Central Financial Work Commission, the joint issuance of the “Guiding Opinions on Promoting the Entry of Medium and Long-term Funds into the Market,” aiming to guide medium and long-term funds into the market, overcome obstacles in entering social security, insurance, wealth management, and other funds, and boost the capital market.
Additionally, this Politburo meeting also discussed improving employment and social welfare. In terms of stabilizing employment, there were differences in the depiction of key employment groups compared to before. In addition to fresh graduates and migrant workers, the new group includes poverty-stricken individuals and households with zero employment. Support is also emphasized for older, disabled, and long-term unemployed individuals facing employment difficulties. On September 25, the authorities issued the “Opinions on Implementing the Strategy of Employment Priority to Promote High-quality and Full Employment.” However, a notable issue is the lack of emphasis on encouraging and developing the private sector and expanding employment. It is well-known that private enterprises contribute to around 90% of new jobs in China.
The meeting stressed the need to help companies weather difficulties by further regulating law enforcement and supervisory actions related to enterprises; to enact a law promoting the private economy to create a favorable environment for its development; and to increase efforts to attract and stabilize investments, advance and implement reform measures for foreign access to the manufacturing sector, and further optimize a first-class commercial environment.
However, counter to the meeting’s initiatives, on September 25, Zhou Tianyong, the Deputy Director of the Institute of International Strategies at the Central Party School of the CPC and an economist, published an article urging an immediate halt and banning of local party committees and governments from using financial penalties and imprisoning private entrepreneurs to extort money for local fiscal revenues. This phenomenon, known as “long-distance fishing,” occurs when local governments, short on funds, resort to capturing entrepreneurs from other areas to extort money.
In conclusion, this Politburo meeting differs significantly from previous ones. However, regarding the scale of fiscal stimulus policies, including real estate incentives, the exact amount has not been disclosed as some observers claim. It is not simply about printing money as needed. The specific policies are still under discussion; Tuesday’s financial meeting involving the People’s Bank of China and other authorities was hastily convened under Xi Jinping’s directive within 48 hours. Additionally, increasing fiscal stimulus relies on issuing special national debt, requiring approval from the National People’s Congress for additional deficits and bond issuance. Therefore, the end of October, during the Standing Committee of the National People’s Congress, will provide a period for observation.
The overall scale is likely not as large as expected by external parties. On September 26, Reuters reported that two informed sources revealed that the Chinese government plans to issue nearly 2 trillion yuan (approximately 284.3 billion US dollars) of special sovereign debt this year to administer further “strong medicine” for China’s “critically ill” economy.
Furthermore, the sources disclosed that China is considering injecting up to 1 trillion yuan (around 142 billion US dollars) of capital into its largest state-owned banks to enhance their ability to support the struggling economy. This would be Beijing’s first capital injection into major banks since the 2008 global financial crisis.
It is anticipated that the issuance of 3 trillion yuan in new national debt is already underway. However, it is worth noting that unlike the anticipated main stimulus for consumption and construction of a social security system, the authorities’ primary direction seems to focus on subsidizing durable consumer goods and equipment, with only minor benefits directly impacting households.
One source mentioned that the funds raised through issuing special sovereign bonds by the Ministry of Finance would be used to provide subsidies for the replacement of old products with new ones and for the replacement of large commercial machinery and equipment.
Additionally, these funds would be used to provide a monthly subsidy of 800 yuan per child to families with two or more children, with an exception for the first child in each family.
So far, despite the Chinese stock market and US-listed Chinese companies experiencing significant gains, investors still feel uncertain about China’s future as critical issues remain unresolved, such as real estate challenges and consumer confidence issues. The Wall Street Journal believes that while the stock market has sparked optimism, the question remains: will investors and businesses commit without resolving underlying concerns about potential economic weakness?
Analysts from Morgan Stanley suggest, “The scale and sustainability of the rebound depend on whether we can successfully overcome currency tightening and whether corporate profit growth can rebound to the bottom.” Currently, currency tightening and corporate profit growth remain fundamental to the stock market’s sustainability and are problems that the Chinese authorities are grappling with.
On September 25, Goldman Sachs’ equity strategy analysis team published a report stating that although this round of policies may not fundamentally reverse the situation, it will catalyze a new round of policy rebound. They continue to favor Hong Kong stocks but are open to tactical investment in Chinese stocks until signs emerge that the downward cycle of the real estate market is nearing its end.
Please pay attention to the term “tactical investment,” indicating that investments in Chinese stocks are dependent on market conditions and are not a long-term strategic view of confidence in the Chinese economy.
Phillip Wool, Portfolio Manager at Rhine Unison Global Consultants, stated that China’s current plans mainly involve “injecting liquidity into the market,” but we are in a stage where “only liquidity alone cannot bring about the sustained recovery that long-term investors hope to see.” In simpler terms, China’s economy is now caught in a liquidity trap, with the central bank pouring money into the financial system without effectively reaching the real economy. This is a long-standing and increasingly severe issue in China’s economy—balancing loose monetary policy with tight credit.
Wool emphasizes, “As long as demand remains weak, no one is willing to borrow money, so such measures will not yield the expected results.”
The root cause of the liquidity trap, as I have previously explained, lies not only in the adverse external environment but primarily in more and more entrepreneurs choosing to stay inactive due to the instability of Chinese policies and the policy discrimination against private enterprises, leaving them feeling insecure.
Gary Tan, Portfolio Manager at Allspring Global Investments, stated that this week’s measures are unlikely to change his stance on reducing holdings in China. He asserts, “We believe that only fundamental changes in China’s currency tightening prospects and the real estate market will prompt investors to allocate new funds into China.”
Vivian Lin Thurston, Portfolio Manager of the Emerging Market Growth Strategy at William Blair, is currently reducing exposure to China and states that they are not significantly affected by the new measures.
However, Thurston notes that her fund may consider purchasing stocks with improved fundamentals and less affected by economic conditions.
Xing Ziqiang, Chief Economist of Morgan Stanley China, believes that due to limited space for boosting economic growth from external demand, China may shift from its past focus on investment to promoting consumption. This strategy aims to increase the share of household income in GDP and reduce the national savings rate to stimulate domestic consumption, a process that requires a sustainable reform of the social welfare system.
Zhu Haibin, Chief Economist of JPMorgan China and Director of Economic Research for Greater China, asserts that resolving China’s economic imbalances, structural employment issues, and currency tightening pressure requires adjusting policy directions to balance support for the service and manufacturing industries, as well as consumption and investment. Some adjustments, particularly in the gaming and educational sectors, support consumer spending through subsidies, but the process of policy direction adjustments still has a long way to go.
So, what will the Chinese authorities do next, and how will China’s economy develop further? Let’s continue to observe and find out.
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