China Shifts to Stimulus Mode With Xi's Options Dwindling
Comment of the Day

June 13 2023

Commentary by Eoin Treacy

China Shifts to Stimulus Mode With Xi's Options Dwindling

This article from Bloomberg may be of interest to subscribers. Here is a section: 

The new stimulus package under consideration has been drafted by multiple government agencies and includes at least a dozen measures designed to support areas such as real estate and domestic demand, according to people familiar with the matter. 

A key component is support for the real estate market. Regulators are seeking to lower costs on outstanding residential mortgages and boosting relending through the nation’s policy banks to ensure homes are delivered, one of the people said.

The State Council may discuss the policies as soon as this Friday but it’s unclear when they will be announced or implemented, the people said.

“The aim of stimulus this time is to keep growth ticking over, consistent with the relatively conservative ‘about 5%’ gross domestic product growth goal, rather than to spur a round of robust growth,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics. “Policymakers are still wary of repeating the kind of debt hangover that the Global Financial Crisis stimulus produced and they spent the decade up to the pandemic trying to sort out.”

Property Woes
The weak property market remains a major drag on China’s economy, although policymakers appear reluctant to use its old playbook of driving up investment in real estate as a way to boost growth. Goldman analysts said in a recent report they don’t expect a repeat of the 2015-2018 shantytown renovation program that pumped central bank money into the property sector and sent home price surging.

Beijing is seeking to reduce the economic and fiscal reliance on the housing market, Goldman said, which suggests an L-shaped recovery in coming years.

Eoin Treacy's view

The old playbook is whenever a problem arises, governments and central banks will open the sluice gates of liquidity to make it go away. In the 15 years since the global financial crisis that has been the mantra every investor has learned to live by. The belief nothing has really changed is the primary reason for bullishness on Wall Street today.

If we think about where the liquidity spigots are situated, we can come up with an answer for whether anything has changed. The USA, China, Japan and the EU are the primary liquidity providers.

China has exceptionally high property prices and has built world class infrastructure. The impressive growth of the economy has fuelled the surge in real estate prices. Current valuations assume the rate of economic growth and trickledown economics will continue to accelerate.
That fact economic growth targets have halved over the last several years is where fears of a busting property bubble are focused. It represents a catch-22 for the Chinese administration and therefore they have little choice but to provide less in the way of assistance compared to previous episodes. At 1.76% the credit impulse is nowhere near the peaks that have That suggests a significant change in the outlook for global liquidity conditions

The USA has seen the cost of paying the interest on government debt rise from $400 billion to $600 billion in the last 2 years. The Fed is no longer remitting profits to the Treasury and deficits are still at historic levels. It is only a matter of time before the Fed will need to supplement liquidity conditions or the government bond market will be in trouble. The bet among institutional investors is this will usher in yield curve control. The Dollar is rolling over and stock investors are betting this will inflate asset prices.

Japan remains wedded to its yield curve control and that is clearly putting downward pressure on the Yen. That is the one source of global liquidity which is both reliable and currently active.

For its part the ECB is still raising rates and engaging in quantitative tightening. 

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