Will China's latest stimulus make any difference?

One of the problems for investors in China is trying to work out what the government’s official position is on economic growth.

Having banned the publication of youth unemployment data and applied pressure to academics and research companies – polling firm Gallup is the latest company to announce its exit from China – it now seems counter-intuitive to see the Hang Seng stock market posting consistent rises over the past couple of weeks after several grinding months of losses.

The reason for this renewed interest in China equities has largely disappeared behind other geopolitical headlines, but essentially boils down to the People’s Bank of China flooding the money markets with liquidity in recent weeks. In short, the government has brought down the cost of borrowing, which had risen as government bond issuance and tax payments came through and the domestic banking market could not cope with the demand. In the meantime, the sudden injection of cash has clearly spilled across into the stock market itself. The total intervention package amounts to the equivalent of $137bn (£111bn).

The question is whether the intervention is a sign of confidence or a measure of alarm at a time when many government-owned companies and local authorities are attempting to rollover record amounts of debt. According to sources cited by Reuters, local authorities have borrowed the equivalent of $12tn for infrastructure development, of which at least 10 per cent must be refinanced over the next year. At the same time as a debt crunch looms, the problems with China’s property market mean that a key source of income – the sale of land to developers – is no longer available to prop up local government finances.

There is some suspicion that the government is trying to resolve the loan restructuring process by stealth. No detailed plans for a broader debt restructuring have been published, despite a promise to do so back in July.

The Chinese government does have levers it can pull when it comes to the direction of the debt markets. It has monopoly control over credit processing and supply, which means it can take measures to smooth out the refinancing process that would never be deemed permissible in a full free market economy. For example, simply reclassifying ‘non-performing loans’ as ‘performing’ allows local banks to limit their paper credit losses during the refinancing process, while ensuring that loans don’t exceed 10-year terms. It can also stipulate that potential yield on the debt goes no lower than the 2.7 per cent interest available on equivalent government bonds to avoid moral hazard.

Do statistics reflect reality in China?

The key problem for anyone analysing the situation is whether the statistics, even double-sourced, bear any relationship to reality. This has been an issue that US consultancy China Beige Book (CBB) has been wrestling with since China rejoined the global economy.

According to its research, the stimulus needs to be interpreted in the context of China’s broader fiscal position. It notes that the government had already pencilled in an expanded budget deficit of 3.8 per cent for this year. “Will this have a meaningful effect on the economy? There may be sector effects, perhaps, depending on the spending pattern. In terms of aggregate effect, [the stimulus] should mostly be viewed as defence against the possibility of a noticeably slower Q4.” The consultancy also said that the extra spending is earmarked for China’s northeast and includes items such as flood defence and disaster recovery.

This is not the only area where the figures are ambiguous. For example, recent reports have highlighted some growth in Chinese services industries in the last quarter, but CBB takes the view that much of the “revenge spending” on eating out and travel seen after the lifting of Covid-19 restrictions has come to an end and that these sectors might not see any further growth until the Chinese New Year. Meanwhile, the perennial problem with commercial property valuations looks set to continue, although there has been some improvement in residential values, the consultancy said.

The possibility of an upswing has prompted movement in London-listed firms that have large interests in China and Asia. Emerging markets investment manager Ashmore (ASHM) saw a small share price rise on the back of China stimulus news but whether it is likely to see a recovery in asset values remains to be seen. The ongoing strength of the US dollar is likely to counteract equities in emerging markets in the short term, as investors chase the greenback’s safe-haven appeal and the US economy’s surprising strength in preference to emerging market bargains.