JPMorgan calls it “the most comprehensive, coordinated policy easing in recent years”. Goldman Sachs says policymakers have “finally changed course amid growing economic headwinds and unleashed a set of more forceful and more coordinated easing measures”, while both Bank of America and Morgan Stanley believe there has been a significant policy pivot.
Wall Street banks have not been this bullish on the prospects for Chinese economic stimulus in years. Ever since China’s post-pandemic recovery faltered, investors have been waiting for Beijing to take more aggressive action to boost domestic demand and put an end to the longest period of deflation since the late 1990s.
The decisive shift during the past several months towards bolder monetary and fiscal policies, in particular the government’s decision in early December to prioritise domestic consumption, has given a much-needed fillip to Chinese stocks.
The Shanghai Composite Index and Hang Seng Index were among the best-performing major financial assets last year. A “fast and furious rally” served as a reminder that China remains a large and liquid market that investors should not ignore, Bank of America said.
However, the rally in equity markets was already fading by the end of last year. Its success had more to do with relief that Beijing finally recognised the severity of the downturn and hopes that the re-election of Donald Trump as US president would be a catalyst for policies to stimulate domestic demand to help offset the blow to exports from the imposition of higher tariffs.
Yet just a cursory glance at China’s government debt market – a more reliable gauge of economic conditions – shows the lack of confidence in policymakers’ ability to reflate the economy. The yield on China’s 10-year bond has fallen more sharply since the policy shift in September, dropping to a record low of 1.6 per cent, only just above its Japanese equivalent.
This is fanning fears that China is succumbing to the chronic deflation and stagnation that plagued Japan following the bursting of its asset bubble in the early 1990s. It is also a worrying signal that although there is likely to be more aggressive stimulus this year, those measures will not be enough on their own to get China’s consumers to save less and spend more.
Increasing the role of consumption in China’s economy is the mother of all policy challenges, involving difficult structural, economic, political and financial trade-offs. Consumer confidence plunged in response to the brutal lockdown in Shanghai in March 2022 and has remained depressed since then. In fact, a gauge of confidence in employment conditions currently stands at a lower ebb than at the height of the lockdowns.
Efforts by Beijing to encourage consumers to prise open their wallets, which include the expansion of a scheme to subsidise households that trade in old appliances, have boosted sales of certain goods but are less effective because of the damage inflicted by the housing crisis on incomes, assets, and confidence. Goldman Sachs estimates that the property-induced drag on growth – which it expects will be minus 2 percentage points this year alone – will linger until 2030.
The scale of the rebalancing required to meaningfully increase the share of consumption in China’s economic output – which stood at 56 per cent in 2023 compared with a global average of 76 per cent – is matched only by the acuteness of the concerns over whether consumption stimulus will work at a time of deep economic and geopolitical uncertainty.
Would more substantial support for households lead to a significant rise in spending, or would the money just end up in savings accounts? Would short-term handouts have a significant impact on growth? And given Beijing’s long-standing concerns about “welfarism”, corruption and financial stability, how credible would a consumption stimulus programme be?
The inescapable truth is that too many pieces need to fall into place for consumption to be a big enough and durable driver of growth in the coming years. In addition to the political and structural constraints to boosting domestic demand – rebalancing requires major fiscal reforms to increase healthcare and pension provision – it is not clear how Beijing intends to reconcile consumption stimulus with investment in advanced manufacturing industries to make China more self-sufficient.
In its year-ahead outlook, Nomura said “it would be a mistake to assume policymakers have already reached a consensus on the scale, details and execution of stimulus measures”.
However, there is no such thing as immaculate rebalancing. The share of consumption in China’s economic output was more or less the same 20 years ago, when domestic and external conditions were much more favourable. Structural reform is never easy, but if ever there was a time for China to prioritise domestic demand, it is now.
Beijing has little choice but to encourage consumer spending. Even a messy pivot towards consumption is better than no pivot at all. The pressure on policymakers to distinguish today’s China from 1990s Japan has never been this intense. While the pessimism in bond markets might be overdone, the message is clear: dramatic action is needed to revive domestic demand and dispel deflation.
