Why is China hesitating with the stimulus bazooka? Morgan Stanley intervenes By Investing.com

Investing.com– China’s recent economic support has largely disappointed investors holding out for a “bazooka” of stimulus, with Morgan Stanley saying Beijing has limited room to implement fiscal measures.

MS analysts wrote in a recent note that China’s biggest economic obstacle remained the deflationary debt loop and that the government needed to adopt stronger measures to boost consumption.

“The need of the hour is a Rmb10 trillion ($1.42 trillion) package aimed at supporting consumption and offsetting property inventory,” MoS analysts wrote.

But the SM claimed that policymakers were reluctant to adopt “forced fiscal tightening”, with the main point of contention being the high level of public debt and falling tax revenues.

The MS said Beijing continues to see investment stimulus as still better than consumption – a trend that could add to excess production capacity and further deflation.

China was also likely to see diminishing returns on higher investment.

Beijing announced a series of stimulus measures in late September, including lower interest rates, looser property restrictions and more liquidity support for stocks. The government also reiterated its commitment to meet its annual gross domestic product target of 5 percent after second-quarter growth missed expectations.

But the measures largely disappointed investors who had been calling for more targeted fiscal support.

To that end, China’s Ministry of Finance said it will hold a briefing this weekend to outline the fiscal stimulus measures.

The MoH said any short-term fiscal measures could provide limited support, and an ideal scenario would be for policymakers to target GDP growth of 4% to 4.5% as they shift their focus towards relaunching consumption and supporting the real estate market.

The MS said that under its current approach, Chinese deflationary pressures are likely to rise, as is debt-to-GDP. Such a scenario presented weaker investment returns and would also affect corporate profits.