In recent weeksChina’s economic policymaking has not only been inadequate but also somewhat skittish. On January 23, the video game draft rules disappeared from the regulator’s website a month after their appearance, as if they had never existed. The regulations, which would have sprinkled games with pop-up warnings against “irrational consumer behavior,” had led to a steep sell-off in the shares of tech companies like Tencent.
The next day, Pan Gongsheng, governor of China’s central bank, held an unusual press conference in which he cut bank reserve requirements by more than expected and vowed to “strive to stabilize the market.” It was an attempt to reassure investors after the bank failed to cut interest rates earlier this month.
While other governments are used to being bullied by the markets, China prides itself on keeping its financial sector in place. These concessions to market sentiment were therefore remarkable. However, they were not very effective. Data for January 31 showed a slowdown in construction and a continued decline in manufacturing prices. Chinese stock markets fell again, returning to levels before Mr Pan spoke. According to Bloomberg, the stock markets of mainland China and Hong Kong have lost more than $1 trillion in value this year.
So the inconsistency of Chinese policy has cost a lot of money. And there are even more examples. For example, according to Reuters, the central government has ordered twelve provinces and cities to halt infrastructure projects. Concerns about wasteful behavior are understandable. But such restrictions will make it all the more difficult for the Chinese government to achieve the fiscal easing needed to revive confidence and growth.
China is indeed facing ‘de facto budget cuts’, says Robin Xing of the bank Morgan Stanley. On-balance sheet borrowing has not been able to offset tighter off-balance sheet local government borrowing. Together with a real estate crisis, this has led to a slowdown in Chinese nominal growth. The GDP The deflator, a measure of prices, has fallen for three quarters in a row – the longest period of deflation since the Asian financial crisis hit China in 1998.
The weakness of the stock market reflects this economic situation. It also reflects uncertainty about how the government will respond. The draft rules brought back memories of the “regulatory storm” of 2021, when officials happily cracked down on internet companies and what they called the “disorderly expansion of capital” into areas like private tutoring. The economy is weaker now than then and the government seems more sensitive. But if business were to recover, would such rules return? The fear of what might happen if the market recovers makes such a recovery less likely.
There are also doubts about how far the government will go to save the property market. For now, it has put aside concerns about speculation, leaving cities free to remove restrictions on owning multiple flats. Last week, Guangzhou lifted purchase limits on larger apartments. This week, Suzhou went further and dropped restrictions on all flats.
Yet such rules are not the biggest obstacle to buying a house. Of greater concern is the fear that a pre-purchased apartment will not be delivered because the project developer may run out of money. Some economists therefore think that the central government will have to set up a fund to take over unfinished projects or to guarantee advance payments on real estate, just as bank deposits are guaranteed.
It is also unclear how much fiscal stimulus the central government is willing to provide. When the country raised its budget deficit target in October and said it would issue US$1 trillion ($140 billion) worth of bonds in its own name, one could believe a signal was being sent. After years of relying on local governments to support the economy, the central government was now willing to use its stronger balance sheet to put a floor on growth.
Since then, the central government has been slow to spend the 1 trillion yuan. At the World Economic Forum in Davos, Li Qiang, the Chinese premier, boasted about how little stimulus China needed. In March he will announce the official growth target, budget deficit and bond quotas for the rest of this year. Perhaps the government will be ambitious. But with markets falling, March seems a long way away.
Although stock ownership does not represent a large share of household wealth in China, and stock issuance accounts for a small share of corporate financing, the confidence of consumers, homebuyers and entrepreneurs is crucial to the country’s recovery. It is unlikely that sentiment will revive if the market continues to make such grim judgments about the prospects for the economy.
Mr Pan, Mr Li and He Lifeng, China’s economic czar, have all stressed the importance of a stable stock market in recent days. But their words alone have not impressed investors. One image circulating online shows a suitcase full of horns, trumpets and other wind instruments. They represent everything that Chinese policy instruments have to offer. ■
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