Xi Jinping's economic adrenaline shot is buying China just a little time

First he sipped tea to compose himself. Then Chinese central banker Pan Gongsheng launched the country's boldest policy campaign in decades.

In a rare, high-level press conference in Beijing on Tuesday, the governor of the People's Bank of China and other top financial officials unveiled a series of easing measures that market observers have been clamouring for for weeks. These include interest rate cuts, more cash for banks, bigger incentives for home buying and plans to consider a stock stabilization fund.

Mainland and Hong Kong markets surged, with the CSI 300 index – a benchmark of onshore Chinese stocks – posting its biggest gain since July 2020. US equity futures advanced and European shares rose thanks to sectors heavily invested in China, including automobile and luxury goods makers.

The market reaction to the policy storm suggests that Pan, a technocrat who spent time at Harvard and Cambridge, has bought the Chinese economy some precious time. Yet economists believe this is just a down payment if President Xi Jinping is going to pull the roughly $18 trillion economy out of a prolonged slump caused by a massive property market crash, consumer price weakness and rising global trade tensions.

Duncan Wrigley, chief China economist at Pantheon Macroeconomics, said, “I don't think this is enough to address the underlying issues behind China's move toward a deflationary spiral.” He added that China needs “a package of reforms to fundamentally restructure the economy and boost consumption growth.”

Tuesday’s briefing, which was hastily arranged just 48 hours ago, came after weeks of growing concern among top leaders in Xi’s government, according to people familiar with the situation. Senior policymakers held several unscheduled closed-door meetings to discuss the economy as it became increasingly clear that this year’s growth target was slipping out of reach, the people added.

Of particular concern was that officials in at least one major coastal province, which contributes significantly to growth, had warned it would have difficulty meeting its gross domestic product (GDP) target, one of the people said.The quick turnaround from the Communist Party’s top leaders came as a surprise to many officials, who had waited months to hear any response to policy proposals designed to revive the economy. Last week they suddenly received a barrage of requests for more information, forcing some to stay up all night ahead of Tuesday’s briefing, according to regulatory officials who asked not to be identified discussing private matters.

That work seemed to have paid off. Pan and other officials have changed the narrative about China’s economy, for the time being. It’s a big shift: In recent weeks, banks from Goldman Sachs Group Inc. to UBS Group AG have cut their forecasts for China’s economic growth, as a slew of poor data has stoked concerns about a collapse in prices.

Bloomberg Economics and others now expect the government to achieve Xi’s goal of growing GDP “by about 5%” this year. But most economists also agree that more is needed to avoid Japan-style deflation. What’s lacking is a coherent strategy to motivate China’s 1.4 billion people to increase spending.

“A lot of China's problems are driven by demand or confidence,” said Nigel Peh, a portfolio manager at Timefolio Asset Management Co. “Overall, I don't think these measures will make a big difference, because China's problems are complex. And there is no one solution.”

With the central bank surprising markets by doing more than expected, all eyes are now on the finance ministry. More fiscal measures could be announced in the next few days as Xi's 24-member politburo is due to meet ahead of a week-long annual holiday starting Tuesday. The event will mark the 75th anniversary of the Communist Party's founding of the People's Republic of China.

Despite facing pressure from the US and elsewhere to boost consumption and rebalance the economy away from manufacturing, Beijing's leaders would prefer to avoid giving people cash payments. Handouts are a common policy prescription to boost demand in various countries, but China is concerned about creating a welfare state it cannot afford – and in a country with one of the world's highest savings rates, officials doubt most people will spend the money in any case.

This leads the market to expect more funds to buy unsold homes, more spending on social welfare and more steps to help consumers sell old appliances. The finance ministry may pressure local governments to sell more bonds to increase spending on infrastructure.

There is also debate within China over whether to break with unwritten rules to keep its fiscal deficit at about 3% of gross domestic product or less and maintain its sovereign debt-to-GDP ratio below 60%. The government should “substantially increase” fiscal spending to pay for education, medical care and social security, according to Xu Qiyuan, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. The think tank is affiliated with the State Council, China’s equivalent of the U.S. Cabinet.

“While expansionary policies have side effects, the lesson we should learn from Japan is that if expansionary policies are not adopted or delayed, the side effects will be even worse,” Xu said. “China should not be bound by the old fiscal principles of the US and Europe.”

Officials in Beijing want any financial measures to instill greater confidence in the private sector. But Xi’s government has taken a number of steps in the past several years that do just the opposite, including cracking down on tech giants such as Alibaba Group Holding Ltd. and condemning the “hedonistic” lifestyles of finance workers.

At least three top investment bankers from different securities firms have been detained in recent months, as well as five current and former employees of British drugmaker AstraZeneca Plc. Concerns about the safety of executives, rising U.S.-China tensions and an economy hampered by a troubled property sector are keeping foreign investors away.

“It looks like we're a long way from real investment in the Chinese property market,” said Hamish Macdonald, BlackRock Inc.'s Asia-Pacific real estate head and chief investment officer, when asked about the impact of the stimulus.

“I want foreign capital to focus on this and I want domestic capital to buy it as well,” he said. “There are not too many buyers in either category at the moment.”

Pan and other officials at Tuesday's briefing stuck firmly to monetary policy. And there was no mention of the word “deflation,” which Chinese officials have tried to censor.

Still, the fact that the PBOC governor held a live televised briefing to announce major monetary policy moves, provide some advance guidance, and answer reporters’ questions represents a major change in China’s modus operandi.

Under previous governors, the PBOC usually announced major monetary policy decisions in statements published on its website. Sometimes some background information was provided in a simultaneous release, often attributed to an unnamed “relevant official.”

For some investors, the transparency shown on Tuesday signaled Beijing's readiness to halt a decline that has wiped more than $6 trillion off the market value of Chinese and Hong Kong stocks since their 2021 peak.

“The clear direction and financing from the PBOC to support the stock market has taken the market by surprise,” said Linda Lam, head of equity advisory for North Asia at Union Bancaire Privee in Hong Kong.

“Chinese capital markets should be enjoying a sweet honeymoon period in terms of liquidity,” he said. “China is buying time to fix deeper growth problems.”