Investors have been hoping for a big fiscal stimulus package from China to jumpstart its struggling economy, but longtime China watchers say those hopes are likely to be dashed. Economic data from the country continues to show a slowdown in growth, with retail sales, industrial output, and investment all growing at a slower-than-expected pace. Additionally, concerns over the troubled property sector are casting a further shadow on the outlook. Despite calls for Beijing to deliver a massive fiscal stimulus, economists suggest that it may never come or be significantly scaled back.
China’s Hoped-for Fiscal Stimulus Unlikely, Say Experts
Many investors have been eagerly awaiting a large-scale fiscal stimulus from China, similar to the one implemented during the 2008 financial crisis. However, experts believe that Beijing is unlikely to deliver on these expectations. The approach of throwing money at every problem is no longer seen as effective, and policy planners are being more cautious when it comes to stimulus measures. Instead of a major package, China has been providing small doses of stimulus along the way, making it unlikely that a significant fiscal stimulus will be introduced.
Difficulties in Reviving China’s Property Sector
The property sector, which once played a crucial role in China’s economic growth, has become a source of distress for the country. Attempts to revive the sector through policies such as easing home buying restrictions and extending loan relief for developers have not had the desired effect. Household confidence in the property market remains low, and companies are not willing to borrow and invest. The government’s focus on property stimulus is viewed as ineffective by economists and investors, as it fails to address the underlying issues causing the slowdown in the sector.
Beijing Reluctant to Implement Massive-Scale Stimulus
Unlike during the 2008 financial crisis, China has been reluctant to implement a massive-scale stimulus package to boost its economy. One reason for this reluctance may be Beijing’s confidence that it will still achieve its 5% GDP growth target for the year. If the government believes it can meet its growth targets without significant stimulus, it is likely to be more conservative in its approach. Additionally, high debt leverage and pressure on the Chinese yuan’s exchange rate limit Beijing’s willingness and ability to conduct a strong stimulus.
Debt and Local Governments Add to China’s Economic Woes
China’s strict COVID-19 lockdowns and the turmoil in the real estate market have strained local governments’ balance sheets, leaving them burdened with substantial debt. Fears have arisen over the potential for defaults on debt sold by local government financing vehicles (LGFVs). Investment demand in China primarily comes from local governments, and it is crucial for stimulus efforts to focus on providing them with new funding. Without new money, local governments will be unable to continue making investments that have supported economic growth.
Bets on China’s Recovery Go Wrong for Investors
Financial markets have been divided over whether China will roll out more tangible measures to spur growth. Some investors remain hopeful that a potential rally will occur and advise others to “buy the dip” in the coming weeks. However, expectations for China’s recovery in 2023 have been deemed unrealistic by experts. Investors need to recognize that China is undergoing a significant shift in its approach towards the markets and that the government’s priorities have changed to eliminating risk in the economic system rather than just pursuing robust economic growth.
Investors hoping for a significant fiscal stimulus from China to revive its ailing economy are likely to be disappointed, according to experts. China’s economic data continues to show a slowdown in growth, and the property sector remains a major source of distress. While calls for a massive fiscal stimulus package are growing, economists suggest that Beijing is unlikely to deliver on these expectations. Debt and local governments add further challenges to China’s economic woes, and bets on China’s recovery have gone wrong for many investors. As the country undergoes a significant reset in its approach towards the markets, expectations for a quick turnaround may need to be adjusted.
Analyst comment
Overall, the news is negative. The market is likely to experience further slowdown as China is unlikely to deliver a significant fiscal stimulus, the property sector remains distressed, and there are challenges related to debt and local governments. Expectations for a quick turnaround need to be adjusted.
