Xi has finally realized what’s ailing China

Shuli Ren, Bloomberg

Once bitten, twice shy. China’s latest supercharged stimulus measures have left many investors unconvinced. Despite Beijing’s repeated promises to revive growth through rate cuts and special lending programs, little progress has been made. The property market remains stagnant, deflation persists, and youth unemployment has hit a record high.

Investors are asking how this stimulus is different: Is it China’s “whatever-it-takes” moment? Has the economy deteriorated enough to force Beijing into action? With FOMO (fear of missing out) kicking in, global asset managers are debating whether the government has the will or fiscal capacity to restore economic confidence.

Looking at the latest policy announcements, it’s clear China’s leaders have finally grasped what’s really ailing the economy and why past measures have failed.

Three key details stand out. First, fiscal power. For the first time since 2018, the Politburo, led by Xi, discussed economic matters in September, focusing heavily on boosting fiscal spending. China is facing a “second wave of shocks,” according to Nomura economist Lu Ting. Local governments, once growth engines, have become impediments due to the property market slump and declining land sales revenues. Instead, they have resorted to levying exorbitant fines on traffic violations and other minor infractions to meet financial targets.

In times of economic slowdown, both fiscal and monetary measures must be deployed. While the People’s Bank of China has cut rates, the rest of the bureaucracy has been idle, even frustrating citizens and businesses. The latest budget targets a 4.9 trillion yuan deficit for government infrastructure funds, but by August, only 2.1 trillion yuan had been spent.

The Politburo’s focus on fiscal spending, borrowing, and the issuance of ultra-long sovereign and special-purpose municipal bonds signals that Xi now understands why monetary easing alone has not worked.

Second, youth unemployment is a growing concern, alongside the property slump. With over 10 million new graduates annually, youth unemployment hit 18.8% in August, despite a change in data methodology that excluded students from the labor force to “improve” the numbers. There has been a noticeable shift in official rhetoric. Last year, Xi told young people to embrace hardship, only to face online ridicule. This year, his tone has changed, emphasizing the need for quality jobs. The government recently announced social security benefits for graduates who remain unemployed for two years.

This reflects an acknowledgment of the structural labor market issues facing Gen Z. As China shifts to new growth sectors like EV manufacturing, crackdowns on real estate and financial services have limited job options. While there are blue-collar jobs, urban youth may be reluctant to work in factories or as food delivery riders for companies like Meituan, even if those jobs pay well. The push for “quality” jobs has become a new official slogan, marking a positive change.

Third, the property market. In May, China introduced a broad rescue package, lowering mortgage rates and converting unsold homes into public housing. The PBOC also created a 300 billion yuan re-lending facility to enable state-owned entities to buy apartments from distressed developers, helping them complete pre-sold flats. However, there was little uptake. Now, the central bank is increasing the re-lending program, providing 100% of the principal instead of 60%. This reflects China’s traditional medicine approach: tweak the formula and double the dose if previous remedies don’t work.

While being bearish on China remains popular, this round of policy announcements feels different. The new slogans sound more informed and aligned with the public’s sentiments. Perhaps the technocrats are now starting to gain more influence. [Abridged]

Courtesy Shuli Ren, Bloomberg