Should Chinese investors hold their breath for a bazooka from Beijing?

President Xi Jinping’s economic planners are on high alert after an anticipated fiscal stimulus announcement on Tuesday failed to materialize, disappointing investors and capping a historic rally in Chinese shares.

Expectations had grown that an initial round of monetary easing that targeted China’s depressed stock and housing markets last month would be followed by fiscal spending to encourage businesses and consumers to spend.

But the lack of further details has left many investors and economists wondering how Beijing plans to shake off the scourge of the world’s second-largest economy.

what happened on tuesday

Zheng Shanjie, chairman of China’s National Development and Reform Commission, the country’s economic planning agency, held a much-anticipated press conference in Beijing, where he promised accelerated bond issuance to support the economy, advancing about 200 billion yuan. Rmb ($28 billion) over next year. budget for expenses and investment projects.

He also hinted at measures to stabilize the real estate sector, boost capital markets and fuel “confidence” to achieve China’s economic growth target of around 5 percent this year.

But the announcements left many investors puzzled. Hong Kong and China bourses pared gains, with the Hang Seng index suffering its biggest one-day drop since October 2008. The mainland CSI 300, which has risen more than 33% in the past month, opened 5% higher down. Wednesday.

Did investors misread the signs that a bazooka was coming?

The NDRC is unlikely to be the vehicle for a major stimulus announcement. A powerful state body, it focuses more on implementation and oversight than on central policy formation.

Rory Green, head of China research at TS Lombard, said there may have been an overstatement of Beijing’s immediate plans for more fiscal stimulus, following a Politburo statement in late September that promised a stronger support.

He said the monetary stimulus, which was unveiled by the People’s Bank of China, was “quite overwhelming” and did not reflect a change in approach to “growth in any way”. He added: “I think they are still in the stabilization rather than the re-acceleration.”

Xu Zhong, head of China’s interbank market regulator and an influential commentator, warned investors on Tuesday against mistaking the PBoC’s announcement as evidence of the central bank’s share buying.

He also expressed concern about the buying of leveraged funds in stocks, a major feature of China’s stock market bubble since 2015. Many market watchers said Xu’s warning could have helped quell the frenzy the market.

Are there signs that a tax package is on the way?

Despite the lack of new details from the NDRC, many observers remain hopeful that more substantial plans will be revealed in the coming weeks.

The commission said it was “coordinating with relevant departments to expand effective investment” and “fully implementing and accelerating” the steps outlined by the politburo, a tone HSBC analysts said was “constructive”. They added that another “window for action” looms when the National People’s Congress standing committee meets towards the end of October.

Goldman Sachs analysts also said “any large stimulus package may require joint efforts from many key ministries,” pointing to ad hoc meetings of the finance ministry, housing regulators and the politburo, one of the main ruling groups of the Chinese Communist Party.

China’s finance minister will hold a press conference on Saturday focused on strengthening fiscal policy, the government announced on Wednesday.

Analysts at CreditSights warned, however, that while it was “too early to rule out any further fiscal stimulus”, the scale “may not meet market expectations”.

What might a fiscal package look like?

Market participants proposed a wide range of estimates, from a low of 1,000 lei to 10 tonnes of lei.

A reasonable base case, according to Citi, is around 3,000 lei this year, composed of 1,000 lei to offset the local government revenue shortfall, 1,000 lei for consumption-driven growth and 1,000 lei to help recapitalize banks.

Green said that while bailing out China’s big banks is not “particularly necessary,” it could be a beneficial step if those funds went into the country’s stockpile of thousands of smaller banks, many of which are struggling to weather a crisis long-term real estate.

Nicholas Yeo, head of China equities at Abrdn, stressed that the critical issue remains “not a lack of credit, but a lack of demand”, stressing that to have a lasting positive impact, any fiscal stimulus must result in stronger consumption .

Would it be enough to help the Chinese economy?

For much of the past four years, Chinese investors and residents had hoped that Xi’s administration would prioritize economic growth. But it remains unclear whether fiscal stimulus can restore confidence after the damage caused by the pandemic, the housing crisis and Xi’s reassertion of the party’s control over the business landscape.

Aaditya Mattoo, the World Bank’s chief economist for East Asia and the Pacific, said long-standing structural problems such as a rapidly aging population and limited social protection are compounding the pain of falling property prices and slowing income growth, forcing Chinese households to save. rather than spending. Such issues are unlikely to be addressed by the size or scope of the anticipated fiscal stimulus.

Beijing’s reluctance to do more, many analysts said, partly reflects concerns about the need to conserve firepower for more stimulus if Donald Trump, who has threatened higher tariffs on Chinese exports, wins the presidency in next month’s US election.

“I think there’s some caution around the Trump factor and whether they have to assess the risk of a massive trade war starting next year,” Green said.