Policy cocktails on China's economy
Policy cocktails on China's economy
China's recent incremental policies are not merely stopgap solutions. They represent a "cocktail-style" blend that includes both short-term demand expansion and structural adjustment initiatives.
Greetings and welcome to the latest edition of PekingEnsight! We're thrilled to have you join us once again as we navigate the ever-evolving landscape of the Chinese economy.
China has unveiled a series of measures over the past month to implement counter-cyclical adjustments, expand domestic demand, support struggling businesses, stabilize the real estate market and boost the stock market, known as a set of incremental policies (增量政策).
Liu Yuanchun, a renowned Chinese economist and president of the Shanghai University of Finance and Economics, has characterized the current suite of policies as a "cocktail-style" combination of measures that not only provide quick relief, but also aim to lay the groundwork for sustainable growth.
In this edition, Peking Ensight looked at Liu's cocktail metaphor that underscores the blend of different policy tools to create a harmonious effect, and found out the underlying logic of these policies.
Highlights of Professor Liu's opinions
-- A new consensus on the property and capital markets is emerging. Stabilizing the two markets is key to managing expectations, supporting businesses and restoring confidence. Meanwhile, it serves as a prerequisite for boosting domestic demand.
-- China is seeking to create a floor in the capital market through new monetary tools. The move is expected to prevent widespread instances of a company's market value falling below net asset value and help restore rational behavior among investors.
--- The first step in stabilizing the real estate market is to ensure stability in top-tier cities and among leading developers, a goal that has now largely been achieved. As the minister of housing and urban-rural development recently said, China's real estate market has officially entered the process of bottoming out.
New phenomena in economy
Why is a package of incremental policies rolled out in the past month? The answer is related to the new phenomena and new issues emerging in the Chinese economy.
First: GDP growth in Q2 and Q3 fell short of the initial annual target of around 5 percent set at the beginning of the year.
Second: Existing policies implemented since the end of last year have not yielded the expected results, particularly failing to ease the declines in the real estate sector.
Third: A new consensus regarding the property and capital markets has emerged. Stabilizating the two markets is key to managing expectations, supporting businesses, and restoring confidence, and serves as a prerequisite in boosting domestic demand.
Fourth: The “window of opportunity” marked by the Federal Reserve's interest rate cuts and a general easing of monetary policies worldwide.
Major adjustments in policy framework
It is important to understand the logic behind these policies and one significant adjustment in macromanagement is regarding the property and capital markets. Stabilizing the real estate and stock markets is aimed at restoring confidence, and that confidence is essential for expanding short-term demand. That is the logic.
The other is a shift in the fiscal and monetary policy framework. This transition highlights the introduction of two structural monetary policy tools aimed at revitalizing the capital markets. The two tools include the Securities, Funds and Insurance companies Swap Facility (SFISF), and a special re-lending facility to guide banks to provide loans to listed companies and their major shareholders for buybacks and increasing shareholdings.
These two initiatives mark a pioneering step for China's central bank in conducting asset purchases through indirect channels.
This asset purchasing initiative is crucial for establishing a foundation in the capital markets. Currently, China's capital market pricing has experienced systemic distortions. To correct this, the central bank's market interventions are vital, particularly in encouraging major shareholders to conduct buybacks and qualified institutional investors to increase their stock holdings. This strategy is essential for creating a visible floor in the Chinese capital market, one that prevents widespread and persistent instances of a company's market value falling below net asset value.
Industry figures showed that out of more than 5,000 listed companies in China, nearly 800 are trading below their net asset value, meaning their total market value is less than their net assets.
Such measures will fundamentally enhance the capital market's functionality and help restore rational behavior among investors.
In addition, the Ministry of Finance and the People's Bank of China have formed a working group for treasury bond trading in open market operations. This new mechanism should not be underestimated, as it is closely tied to the comprehensive improvement of China's modern central bank system.
If the goal of the incremental policies were simply to implement quick stimulus measures, there would be no need for major adjustments in the policy framework. It's important to note that incremental measures resemble a "cocktail" strategy, combining various elements to address both immediate needs and long-term reforms.
Efforts to build a floor for the stock market are designed to change investor behavior. Along with support for corporate restructuring and long-term capital investment, these measures aim to reshape the overall structure of the capital market.
Property market and domestic demand
The process of stabilizing the real estate sector has now fully begun. The first step in stabilizing the real estate market is to ensure stability in top-tier cities and among leading developers, a goal that has now largely been achieved. As the minister of housing and urban-rural development recently stated, China's real estate market has officially entered the process of bottoming out.
Expanding domestic consumption is being driven by efforts to strengthen social infrastructure and improve livelihoods, rather than simply boosting demand through the large-scale programs for equipment renewal and consumer goods trade-ins launched earlier this year. A key aspect of promoting consumption lies in the long-term increases in incomes and the comprehensive repair of balance sheets. These are fundamental prerequisites for sustainable demand growth in the future.
The incremental policy package aims for a fundamental shift in behavior patterns and incentive systems. It's essential to recognize the determination behind this policy shift, as well as the deep structural and institutional adjustments it implies.
By Han Qiao