No Bazooka, Many Pistols - Stimulus Lifts 2% GDP
Comment of the Day

September 22 2023

Commentary by Eoin Treacy

No Bazooka, Many Pistols - Stimulus Lifts 2% GDP

This is compelling headline from Chan Shu, formerly a senior economist at the Bank of International Settlements which helps to emphasise the new Chinese approach to stimulus. Here is a section:

What’s missing? The government hasn’t so far set out a clear plan to defuse mounting debt risks. Also, a lack of direct support targeting vulnerable households and businesses may make it harder to restore confidence.

A statement from the July meeting of the Communist Party’s Politburo indicated the top leadership recognized the importance of “formulating and implementing plans to resolve local debt.” But the steps taken so far — such as a debt swap of 1 trillion yuan for local government financing vehicles — pale in comparison to the size of the problem.
A reduction in tax burdens for households – higher deductions for expenditure on childcare and education — is a positive move but probably too modest to have a material impact on growth. Broader and bolder support measures are required to revive confidence.

Eoin Treacy's view

Some stimulus is better than none, but the broad question is how dependent is the Chinese economy on credit and leverage? It is well understood the incremental benefit China accrued from infrastructure peaked more than a decade ago.

To avoid the middle-income trap, they had to greatly enhance productivity. There is no doubt some progress was made on that front, but total debt in the economy has tripled from $17 trillion to $51 trillion. They doubled down on infrastructure and property despite the falling rate of return.  

The credit impulse was highly cyclical over the last decade and granted investors some confidence that China’s willingness to provide successive rounds of assistance was a permanent condition. That is no longer true. The measure has been inert for almost two years. It’s a clear confirmation of the piecemeal approaching stimulus.

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