China's Bazooka Stimulus Days Are Done And Gone

Of course, the urgency is rising. Last week, for example, saw Guangzhou become the first“tier one” city to cut down payments and loan rates for many home purchases. Other cities followed
Guangzhou's lead, including Beijing and Shanghai, which loosened local property market restrictions late.

“But there remains little prospect of big-bang stimuat the national level,” Gave says.“As a result, aggregate demand will continue to be subdued and growth weak.”

China's downshift, Gave adds,“will have differing effects on different economies around the world. In Asia, manufacturing exporters partially dependent on Chinese final demand, such as Taiwan, will take a hit, although the pain will be mitigated by a nascent upturn in the electronics cycle.”

The US, he adds,“with little macro exposure to Chinese demand, will be relatively insulated. But Europe will suffer the twin blows of reduced Chinese demand for its exports, together with heightened Chinese competition against its manufacturers because of the soft renminbi.”

To be sure, Li has solid arguments to make that China isn't unraveling in the ways Western media and commentators suggest. Xi and Li have ample latitude and enough levers to prop up growth if and when they choose.

The recent successes by Huawei Technologies and Semiconductor Manufacturing International Corp (SMIC) demonstrate how China Inc is navigating aroundsanctions in nimble and creative ways.

The chip breakthrough buttressed the argument that the Sinotrade war isn't slowing China's ambitions to move upmarket.

It helps, too, that for all the asset bubbles afflicting the Chinese economy, no specific tract of land has ever been worth as much as California as Tokyo's Imperial Palace was in Japan's frothy 1980s.

Still, Xi and Li are determined to balance the short-term desire to boost growth with the longer-term imperative of recalibrating growth engines. However, this is causing consternation across Asian economies that were betting on a post-Covid Chinese growth surge.

In recent months, global markets have ricocheted between excitement over a Chinese stimuboom and disappointment over Beijing taking its sweet time to jolt a slowing economy .

Xi and Li have settled on a strategy somewhere in between by breaking the economy's fall without giving too much support that would incentivize bad corporate behavior.

Under the surface, there are myriad hints that Li's arrival in March put economic reforms on the front burner. In other words, Beijing now cares more about avoiding boom-bust cycles going forward than mindlessly generating new imbalances in 2023.

This anti-Mario Draghi moment has taken ASEAN by surprise. In 2012, the then-president of the European Central Bank made his infampledge that he's“ready to do whatever it takes” to stabilize the financial system via powerful monetary easing.

On Draghi's watch, the ECB unleashed stimuon a level that would've been unfathomable to Bundesbank officials of old. His aggressiveness inspired other central bankers to follow suit, including then-Bank of Japan Governor Haruhiko Kuroda.

In Tokyo, between 2013 and 2018, the Kuroda-led BOJ's balance sheet swelled to the point where it topped the size of Japan's $5 trillion economy.

In both cases, a monetary boom did little, if anything, to make the broader European or Japanese economies more competitive, productive or, broadly speaking, more prosperous. Instead, rich monetary support generated a bubble in complacency.

Excessive monetary easing in Europe, Japan and elsewhere took the ooff government officials to loosen labor markets, reduce bureaucracy, incentivize innovation, tighten corporate governance or invest big in strengthening human capital.

China, it seems, is determined to go the other way. In the months since Xi started his third term - and Li arrived on the scene as his No 2 - Beijing has confounded the conventional wisdom on Chinese stimueven as clear economic headwinds persist.

The closely-watched purchasing managers' index (PMI) survey showed worse-than-expected non-manufacturing activity in August. A Caixin survey showed China's service sector last month expanded at its slowest pace in eight months.

“As market competition was still tight, there was limited room for service companies to raise prices for customers, with the gauge for prices charged recording the lowest level in four months,” says economist Wang Zhe at Caixin Insight Group.

The services PMI suggests“activity in other services industries such as property may have deteriorated further in August,” Goldman Sachs wrote in a note.

One key market worry, says Goldman strategist Danny Suwanapruti,“is whether a weaker Chinese yuan will spur significant capital outflows. However, FX reserves are high, commercial banks' external assets have been built up and the PBOC has tightened capital outflow channels.”

For now, says analyst Michael Hewson at CMC Markets, the outperformance of the dollar“is coming against a backdrop of rising optimism about the prospects for theeconomy.” That, in turn, has markets wondering how a weaker yuan might affect global markets.

Former top International Monetary Fund official Josh Lipsky notes that the fallout from China's slowdown
“can't just be wished away” and further weakness will“change some of the fundamentals of how the global economy has been wired over the past several decades.”

Jyotivardhan Jaipuria, founder of Valentis Advisors, believes that“China is perceptibly slowing down and that will have a secular slowdown in growth because they probably overbuilt the infrastructure.”

Now, he says, Beijing will“have to go through a phase where that whole overbuilt infrastructure which drove all the GDP growth for the last many years is going to start hurting them.”

The property sector also remains a considerable concern.

Troubles at Country Garden, China's largest private property developer, are reminding markets that default risks abound. Recent days brought news that the company reported a record half-year loss of 48.9 billion yuan ($6.75 billion) for the first six months of 2023.

The resulting capital outflows have Li's team unveiling fresh moves to boost personal income tax deductions for childcare, parental care and education. Additional steps to build a better social safetythat encourages consumption over savings are vitally needed.

“Policy momentum is clearly picking up,” says Citigroup analyst Yu Xiangrong.“This macro backdrop could be more supportive for China assets.”

Economist Hao Hong at Grow Investment Group adds that“economic fundamentals, as reflected in the cyclical asset prices, have so far failed to respond to policies as they used to. More needs to be done and will be.”

Yet things are only picking up so much as Beijing avoids another Draghi-like stimuboom that will just add to China's long-term troubles and squander recent progress made in deleveraging the economy.

It's up to Li to explain to ASEAN officials – and global markets – why things are different this time in China. The more directly and transparently he does it, the better it will go over with China's neighbors and the wider world economy.

Follow William Pesek on X, formerly known as Twitter, at @WilliamPesek