Shuli Ren, Bloomberg
China has been talking about stimulating its economy for almost three months — words that have mostly not been matched by deeds.
In late September, Beijing vowed to boost fiscal spending at a quarterly Politburo meeting traditionally reserved for discussing non-economic matters. In reports emerging late Monday from the December gathering, the rhetoric was taken up a notch further. Top officials adopted dovish language on next year’s monetary policy and pledged to “stabilize property and stock markets” in 2025, while the nation’s residential real estate sector enters a fourth year of downturn.
These are seismic changes in messaging. The September meeting marked the first time top policymakers discussed economics since 2018, while the “moderately loose” monetary stance taken up this week is the government’s first major shift since 2011. It’s no surprise then that some foreign observers commented that China would finally bring the big guns out.
Unfortunately, there has not been much follow-through — and despite the excitement over Monday’s communications, I don’t expect any more details from this week’s tone-setting Central Economic Work Conference, which normally only establishes a policy stance. A 10 trillion yuan ($1.4 trillion) local debt swap program, announced in early November, offers no new borrowings and thus should not be considered as fiscal stimulus. This has led to speculation that Beijing is not willing to conduct any large-scale spending, and that it’s worried more fiscal deficit will lead to a debt crisis.
Bureaucracy could be an explanation for the lack of action.
A more plausible explanation is that top policymakers hope that vague, big promises alone can reignite the animal spirits and lift China out of a deflationary spiral.
There’s some rationale behind that thinking. Home prices in the top-tier cities of Beijing, Shanghai, Shenzhen and Guangzhou appear to have bottomed out. Meanwhile, the stock market has held up fairly well since the late September bump and is responding favorably to upbeat market rumors, even as economists cut their 2025 growth forecasts.
Of course, a third possibility is that the bureaucratic apparatus, which in the past engineered shock-and-awe economic policies and lifted China out of poverty in just decades, is no longer effective. The investigation of Defense Minister Dong Jun, appointed only a year ago after his predecessor was fired for corruption, is raising questions over how Xi picks key personnel and how competent they are. Xi also removed protégé Qin Gang as the foreign minister, following reports of an extramarital affair that led to the birth of a child in the US. Those who rise to the top may just be loyal and big talkers, and nothing more.
Grandstanding is dangerous — take a look at the broader economy. While home prices may have stabilized in tier-one metropolises, they account for just 4% of property sales by floor space. In hundreds of smaller cities, the oversupply problem continues to fester and “rotten tails,” or unfinished but pre-sold apartment buildings, are everywhere you look. Meanwhile, the $10 trillion stock market’s fate remains troubled, as long as producers’ deflation lingers on. Wall Street is not Main Street, anyhow.
Big promises were made and they must be kept. This time, Xi’s own credibility is at stake. [Abridged]
Courtesy Bloomberg/Shuli Ren
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