struggling economy of China, can its all-out stimulus measures succeed in sparking a recovery?
Since January 2020, the city's vitality, represented by its Hang Seng Index, has witnessed an unparalleled consecutive drop due to financial struggles and pandemic constraints, affecting both the semi-autonomous region and mainland China.
However, the index took an unexpected turn for the better in late September, following announcements by China's top brass regarding initiatives to aid the nation's struggling economy. The index has surged over 18%, marking its largest two-week growth in nearly two decades. Lun believes the stimulus measures should have arrived sooner, but better late than never.
“Previously, we only had fingers to count each day,” he communicated to CNN from his Causeway Bay office, symbolizing the lack of business. “However, now we receive calls. Things are improving.”
Hong Kong and China markets are experiencing notable growth. Regardless of whether the rally continues and if the advantages of the stimulus measures extend beyond stock investors, influencing the real economy that's grappling with a potential deflationary spiral and is at risk of failing to meet its 5% growth target, hinges on what remains unspoken.
So far, the declared measures primarily focus on monetary policy, which pertains to decisions taken by central banks to regulate borrowing rates and address inflation. China has mainly refrained from revealing fiscal measures, encompassing taxation guidelines or other measures impacting public expenditure.
“The issue appears to be a dearth of consumer confidence,” Nikko Asset Management economists noted in a report on September 24. “The ideal move would be for the authorities to employ the ‘big guns’ by revealing additional fiscal policies. Such action could rectify this confidence crisis, bolster risk appetite, and stimulate the economy.”
Ray Dalio, the founder of the world's most prominent hedge fund, Bridgewater Associates, expressed in a social media post that this might be China's “whatever it takes” moment, if its leaders decide to act more decisively than what's already been announced.
This significant announcement could occur as early as Tuesday, when the National Development Reform Commission, China's top economic planning agency, is scheduled to hold a press briefing to introduce a package of policies to boost the economy.
There's no need to read the tea leaves
Numerous economists are divided on exactly what Beijing needs to do. However, there's consensus on one point: After a prolonged wait, the leadership shows determination.
The aforementioned conclusion stems from the distinctiveness of the simultaneous joint press conference involving the People's Bank of China Governor Pan Gongsheng, National Financial Regulatory Administration Minister Li Yunze and China Securities Regulatory Commission Chairman Wu Qing, which occurred on September 24, according to Nikko's economists.
“In a system that's characterized by opacity, the manner in which the official announcement was declared caught our attention. Gone are the days of deciphering vague statements, leaving room for interpretation,” they wrote.
The three financial heads directly addressed both domestic and international journalists at the hastily arranged event, indicating a commitment to transparency about such a major policy shift, they concluded.
Pan announced reductions in several interest rates and cash reserve requirements for banks. He also declared reductions in existing mortgage rates and lower minimum mortgage downpayments for second-time homebuyers to support the ailing property sector, which many economists consider the primary source of China's various financial challenges.
“This is unlike any other time,” HSBC economists led by Jing Liu stated last week in an investor note, finding the press conference uncommon. “Everything seems to be happening at once. But this is only the beginning.”
HSBC anticipates Beijing to announce 1 trillion yuan ($142 million) in fiscal spending on consumer goods or large-scale construction projects, which will directly stimulate the economy.
Another 1 trillion yuan might be allocated for recapitalizing banks or aiding indebted local governments to issue bonds. While not directly boosting the economy, avoidance of financial risk could be advantageous, HSBC added.
We need significant funds
Reuters reported on September 26 that China plans to issue 2 trillion yuan ($284 billion) worth of special sovereign bonds this year as part of its fresh fiscal stimulus package.
Money procured through special bonds issued by the Ministry of Finance would be utilized to boost incentives for individuals to purchase larger or newer household appliances like washing machines or refrigerators, and to upgrade industrial-scale business equipment, according to Reuters' sources.
A portion of the money would also fund a month-to-month allowance of approximately 800 yuan ($114) per child for each second child and any subsequent siblings, in an effort to encourage larger families.
Some economists believe that China's leadership, under Xi Jinping, possesses the resources to embark on a more ambitious financial adventure.
Jia Kang, a former director of a think tank related to the Ministry of Finance, informed The Paper, a state-owned newspaper, last week that the recent intensification of monetary policy was vital, and that fiscal policy must keep pace.
He suggested that Beijing issue as much as 10 trillion yuan ($1.4 trillion) in long-term government bonds, specifically for financing essential infrastructure and public works that private companies struggle to finance.
Jia, currently serving as the president of the China Academy of New Supply-side Economics, a private think tank, opined that a potential 10 trillion yuan bond issue was “reasonable” since China had undertaken a similar endeavor before.
In 2008, the nation introduced a substantial fiscal package worth around 4 trillion yuan ($570 billion) to mitigate the effects of the worldwide financial crisis. According to Jia, China's economy has grown robustly since then, making it feasible to issue Treasury bond financing ranging from 4 to 10 trillion yuan.
Barclays' analysts suggested that a 10 trillion-yuan fiscal plan spread over a period of two years could significantly boost the economy, boosting growth by 1 full percentage point. However, they considered it merely as a speculation for now.
Experts agreed that any considerable stimulus measures must prioritize addressing the issue of excess supply in the property market.
As Chi Lo of BNP Paribas Asset Management pointed out last week, "The policy shift... has led to an impressive surge in Chinese stock prices, which might sustain in the short term. However, a strong belief in an economic turnaround is necessary to sustain the recovery of the Chinese economy and financial markets."
The business sector in Hong Kong and China is experiencing notable growth due to the announced stimulus measures. These measures, primarily focusing on monetary policy, have resulted in an unexpected surge in the city's Hang Seng Index.
According to Nikko Asset Management economists, the ideal move to further aid the economy and boost consumer confidence would be for the authorities to reveal additional fiscal policies, such as taxation guidelines or public expenditure measures.
