...China will strategically keep its powder dry until it knows what Trump's plans are with respect to China.
...but they won't be returning to the age of infrastructure building and property development, and they have challenges soon in their export agenda, so domestic consumption remains the last thing they can tap on. And potentially a yuan devaluation. China is still all talk on stimulus – for one good reason
Beijing is again talking up its willingness to revive its spluttering economy. But action is unlikely to come until we know more about Donald Trump’s plans.
Dec 10, 2024 – 11.27am
A few weeks ago, a delegation of four very large global businesses, including one of Australia’s biggest companies, was granted an audience with China’s Premier Li Qiang.
According to one attendant, who will remain anonymous given the sensitivities involved, it was a very different type of chat. Li was as interested in seeking feedback as he was in giving it.
Top of the premier’s agenda? What the business leaders thought of China’s stimulus efforts.
Their response was blunt: the measures announced so far haven’t moved the dial, and more needs to be done to restore domestic and foreign confidence in the Chinese economy.
While Li did defend the efforts China has so far made to get the economy moving, he made it clear that he was receptive to the concerns of the business leaders.
Perhaps more importantly, he emphasised that China has no shortage of fiscal and monetary firepower that it can deploy.
Those at the meeting were left with the distinct impression that the big bang stimulus the market has been waiting for is coming – the question is when.
“A more proactive fiscal policy and an appropriately loose monetary policy should be implemented, enhancing and refining the policy toolkit, strengthening extraordinary counter-cyclical adjustments,” the readout from the Politburo said.
While China has been talking the talk on stimulus for a long time, Monday night’s statements did contain a notable change in language. As Goldman Sachs economist Lisheng Wang notes, the last time China talked up a “moderately loose” monetary policy stance was back in 2009-10 when it primed the economy in the wake of the GFC.
The promise of even looser monetary policy sent China’s 10-year bond yield down further on Monday night to 1.91 per cent – the lowest level in the 22-year history of the country’s market. Chinese authorities have repeatedly warned of a bubble in bonds as investors pile into the instruments, rightly fearing spluttering growth will force further interest rate cuts.
But according to China watcher Michael Pettis, a senior fellow at the Carnegie Endowment, monetary policy is not the main game. As he noted on X, the People’s Bank of China has “accommodated one of the fastest debt increases in history” that looks anything but prudent.
What the economy needs, Pettis says, “is not a more accommodating monetary policy but rather a major shift either in fiscal policy or in the domestic distribution of income”.
“China’s problem is not monetary. It is fiscal.”
There are signs the government is getting that very point. The politburo said on Monday night it is prepared to make “unconventional” counter-cyclical adjustments to boost domestic demand and “forcefully lift consumption”. The good news for Australia
Happily for Australia, previous stimulus packages have focused on the infrastructure and property sectors, which consume plenty of steel. But as one fund manager who has just returned from a research trip to China says, it’s domestic spending that needs support at present.
That was emphasised by Pettis, who points out just how grim the latest Chinese CPI data released on Monday actually was.
Inflation was at an annual rate of just 0.2 per cent in November, well below expectations of 0.5 per cent. But even worse, Pettis says, is that “in the three months from August to November, CPI prices in China have declined at an annualised rate of just over 3.5 per cent”.
So the problem is clear, and China’s government is willing to address it. But the big question of 2024 remains: when will it act?
Those in attendance at the meeting with Li were left with the distinct impression that the Chinese government is keeping its powder dry for one big reason: Donald Trump.
Yes, the economy needs support, and the government has the tools to do it. But launching a big-bang stimulus before China knows what the new Trump administration will do makes little sense.
Trump has already declared he will increase existing tariffs on China – which currently sit at an average of 17 per cent – by a further 10 per cent when he takes office in January. But is that his final word on the matter? The Chinese government, like the rest of us, will want to wait and see.
Stocks in Hong Kong jumped notably on Tuesday morning on the politburo’s pronouncements, and investors including Nick Ferres from macro fund Vantage Point are keen to retain exposure to large Chinese tech platforms, which trade on relatively modest multiples (between nine and 13 times earnings) and have decent forward-looking growth.
But make no mistake: China will remain all talk on stimulus for a little while longer, including at the Central Economic Work Conference that starts later this week. This is going to be a 2025 story.
