Market Views: Will China's next stimulus break from tradition?

The old stimulus playbook, which involved cheap lending and a massive push to infrastructure to boost the economy, is no longer relevant, according to institutional investors. So what can China's government do this time around?
Market Views: Will China's next stimulus break from tradition?

Expectations are growing for a stimulus package to revive China's economy, which after an initial reopening bounce earlier this year, has started to falter.

June data showed China was on the brink of deflation – the consumer price was unchanged from a year earlier, while producer prices fell 5.4% year-on-year, staging the sharpest decrease since December 2015.

The People's Bank of China (PBOC) in the past few weeks has started the easing process by cutting some key interest rates, although on a relatively small scale, which disappointed some investors.

The central bank and National Administration of Financial Regulation also announced the extension of loans and additional funding to support property developers on July 10.

As the economy transitions towards a high-quality and less-deleveraged growth model, the old stimulus playbook -- a massive infrastucture boost and cheap lending -- feels out of step as the government no longer wants to achieve higher GDP at all costs.

So how different will it be this time? All eyes will be on the July-end meeting of the Communist Party's top leadership, which will set the tone for China’s economy in the next six months.

This week, AsianInvestor explores what financial markets expect from any announcements, and the investment opportunities that could emerge as a result.

The following responses have been edited for clarity and brevity.

Chay Kai Kong, senior portfolio manager, Greater China equities
Manulife Investment Management

Chay Kai Kong

We believe China is unlikely to roll out a big-bang stimulus package.

Instead, potential specific policies in areas such as tech innovation and green development, infrastructure, property, and consumption-related may be rolled out.

China has reiterated its support for key areas, such as green development, tech innovation (new energy vehicles, artificial intelligence( AI), semiconductor localisation, green development) and infrastructure (electric vehicles (EV) charging stations, smart grids).

For tech innovation and green development, China strives to maintain its manufacturing leadership in EV supply chain and accelerate its roadmap for AI development.

China is moving to develop a complete AI value chain that covers smart chips and algorithm frameworks to large language models (LLMs). These areas present multi-year, long-term structural growth development for China over the next several years.

For infrastructure, we have seen more recent industrial and infrastructure projects kicking off in China (e.g., Zhejiang province) which strengthen industry chains for new energy and smart Internet of Things (IoTs).

For property, PBOC and National Administration of Financial Regulation's recent announcement relate to extending two measures, i.e., construction loans and extension of trust loans, and additional funding on top of special loans from end 2023 to end 2024 is positive because it shows the Chinese government’s determination to address the issue.

Credit support should improve housing completion and benefit property developers. More potential liquidity support (for example, mortgage rates cuts driven by loan prime rate cut or rate cut) may further help to stabilise the sector.

For consumption, we see a service-led recovery continuing despite slowing.

Alicia Garcia Herrero, chief economist for Asia Pacific
Natixis Corporate and Investment Banking

Alicia Garcia Herrero

Rumors of an imminent stimulus have been in the market since mid-June but nothing official has been announced yet.

More specifically the rumours included an Rmb1 trillion ($139.5 billion) package of special bonds to be issued by local governments mainly geared towards infrastructure projects and with the ultimate objective of lifting confidence.

While clearly needed for the now financially weak infrastructure sector, it is not really clear whether yet one more infra-led package would make the trick of convincing investors that the Chinese economy would go back to a faster growth path.

In any event, no such stimulus has been announced which seems to indicate that Chinese policymakers still prefer to use other tools, which have less of a bearing on the already very high public debt - close to 100% of GDP in the first quarter of 2023 according to our estimates.

The key tool so far has clearly been easing the regulatory constraints that key sectors of the economy have gone through in the last few years.

First and foremost, the three-red lines which constrained the leverage of real estate developers were quietly lifted and substituted by 16 easing measures introduced in November 2022 which have now been renewed.

In the same vein, the tech sector should, in principle, be relieved by the settlement of the open case with Ant Financial which has taken place recently.

The reality is that investors have not reacted too positively to any of the two measures and are still wary about the incoming weak data. More is clearly expected but public debt concerns seem to be putting a break on any policy action, at least so far.

Ben Powell, chief Asia Pacific investment strategist
BlackRock Investment Institute

Ben Powell

Chinese authorities declared back in 2017 three critical battles, one of which was against too much debt.

So, I don't think there's any potential for a huge stimulus, a credit-fueled phenomenon. I think that's very unlikely.

Having a positive interest rate, both real and nominal, is something China authorities have demonstrated they are very committed to even when times were extremely difficult during Covid and before the beginning of trade tensions.

I think they will keep that stance moving forward and stimulus will probably not come from a dramatic interest rate cutting cycle.

The growth target is 5% this year. Given 2022 was a lockdown year, 5% still looks quite easy to achieve, even with the slowing approach that we've seen over the last couple of months and the concerns that the market has.

So, there isn't a real urgency for China authorities to do something very large.

But when you look at other issues such as youth unemployment - that's the kind of thing that will create a response.

So, in the weeks ahead, I would expect to see targeted, specific sector-by-sector policy supporters around different areas.

It seems to us that property is so central to the economic and financial reality of the overall Chinese economy. So even if we see relatively smaller, more targeted stimulus in key areas, it could have a more dramatic knock-on impact.

The Politburo meeting at the end of July will set the overall tone for the next six months. I think that's not just an important meeting for China markets, but also for global markets because we can learn relatively soon if indeed, they are pivoting to a more pro-growth policy stance.

Elizabeth Kwik, investment director of Asian equities

Elizabeth Kwik

Though the government has yet to deploy any major stimulus this year, the policy environment remains accommodative with adequate legroom for support.

There is likely to be targeted support towards the pressure points in the Chinese economy – e.g., property sector and youth unemployment.

The central government has said it would continue to support the economy to ensure China can meet its growth targets.

In the meantime, consumer confidence has not rebounded as sharply as the market had expected, but there is still plenty of reason to be sanguine about Chinese consumers.

Broad-based recovery will likely come in the second half, in line with improving income and employment prospects.

The Chinese government has not relied on handouts to spur consumption demand; hence it is not reasonable to draw parallels with developed markets on China’s re-opening strength.

In the long run, China will continue to have an outsized presence in the global economy, accounting for at least a third of global growth. There is a concentrated push from China to build out critical domestic sectors to attain self-sufficiency. We look for high-quality companies across the five themes – aspiration, digitalisation, going green, health and wealth – where we find the most compelling opportunities. Within that, we are seeing cheap valuations in the Aspiration bucket. This represents a ripe opportunity to get into the China market before a sustained recovery momentum takes off.

Zhu Chaoping, global market strategist
JP Morgan Asset Management

Zhu Chaoping

After the slowdown in economic activities, it has become even more urgent for China’s policymakers to stabilise expectations.

That said, it is also increasingly difficult to balance between short-term stimulus and long-term objectives, and hence the introduction of supportive policies fell short of market expectations at this stage.

Ahead of the Politburo meeting in July, we believe the policy pendulum may swing back to short-term stabilisation measures, with emphasis on coordinated monetary and fiscal measures to boost expectations.

The central government may expand its spending to support domestic demand, backed by central bank credit tools.

Facilitated by the soft inflation readings, further cuts to deposit and lending rates are also expected to help public and private sectors with lower funding costs. Meanwhile, there may be marginal relaxation of property policies, mainly focused on supporting first-time home buyers.

The China equity market has been underperforming its global peers this year, which suggests weak growth prospects and lack of policy stimulus have already been fully priced in, and any marginal improvement in growth and policy conditions should trigger a turnaround in market sentiment.

In the near term, cyclical sectors, such as consumer discretionary, materials and property, may be the major beneficiaries.

Their less-stretched valuation also provides an attractive margin of safety.

On the longer investment horizon, we continue to prefer sectors that should benefit from expanding domestic market and sustained policy support, such as advanced manufacturing, robotics, automation and renewable energy.

Liu Peiqian, Asia economist
Fidelity International

Liu Peiqian

There are many options for calibrating but limited scope for a replay of massive stimulus. Chinese policymakers have turned more pragmatic and targeted in addressing economic issues.

We do not expect an old playbook of massive infrastructure or construction-driven stimulus to be delivered by the policymakers, but we think a policy package that addresses the issue of soft domestic demand and relatively subdued confidence levels would be most needed to drive further recovery.

This should entail a combination of fiscal and monetary easing, reforms and policy assurance to the private and household sectors.

We believe China’s growth and recovery have further room to go. In the interim, more patience is needed to see the growth momentum gaining traction.

Liu Minyue, investment specialist Greater China and global emerging market equities
BNP Paribas Asset Management

Liu Minyue

The subdued CPI and PPI may allow more accommodative monetary policy and growth focus measures to be sustained.

Nevertheless, the overall size of the stimulus this round may not be as big as what we saw in the previous market cycles (i.e., 2013 and 2016).

As China is restarting the growth engine after a longer pandemic and lockdown versus the US and other markets, it may require a series of measures to reverse the market sentiment and confidence.

To further boost, and sustain, the recovery momentum, the current incremental policy easing that the market has been priced in may not be enough, in our view.

Further stimulus is expected, especially more targeted measures to boost consumption, property demand, private sector investment and private enterprises’ development.

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