Behind Xi Jinping’s Pivot on Broad China Stimulus
A bevy of bad news prompted action from the leader—but not a full U-turn
With China’s economy sinking deeper into a funk last month, Xi Jinping finally decided something had to be done.
After resisting calls to take forceful steps to prop up the economy for two years, Xi relented in late September and ordered a barrage of interest-rate cuts and other measures to put a floor under growth.
But Xi didn’t give his economic mandarins a blank check. According to officials and government advisers close to decision-making, he wanted to bail out indebted Chinese municipalities on the brink of collapse and revive the stock market, without veering too far from his focus on letting the state drive China’s transformation into an industrial and technological powerhouse.
For Xi, the officials and advisers say, the near-term goal isn’t to massively stimulate demand but to fend off a brewing financial crisis—or “derisking,” in official lingo, thereby helping to stabilize the overall economy and achieve the 5%-or-so growth target for this year.
The resulting mixed message on what exact stimulus was coming has sent investors on a roller-coaster ride. Markets were initially energized by interest-rate cuts and other easing measures by the central bank only to be deflated by lackluster news conferences from other economic agencies short on details.
Investors, who had been hoping for a massive stimulus package similar to what Beijing rolled out during the global financial crisis, were unsure what to make of what Beijing depicted as a “package of incremental policies.”
That means little change to Xi’s overarching agenda of directing state resources toward fortifying China’s industries against perceived foreign threats. Calls from economists and investors inside and outside China for rebalancing the economy to household consumption from manufacturing haven’t gained much traction.
The shift, tactical rather than strategic, is centered on the central bank and the state coffer providing liquidity support for local governments and big banks, the backbone of funding for the Chinese economy.
Another focus of the policies is to rescue China’s stock market, which has been on a losing streak for nearly four years. The People’s Bank of China is taking the unprecedented step of encouraging brokerage firms, insurers, and listed companies to tap central-bank or commercial-bank funding to buy stocks.
Support for household consumption has mainly come from a reduction in mortgage rates, part of a new push to arrest the multiyear downturn in the property market. Analysts estimate that the cut can save homeowners about 150 billion yuan, roughly $21 billion, in interest payments, a meager relief given the trillions of dollars in annual household consumption in China.
Xi’s centralization of decision-making, which has time and again led to abrupt policy twists and turns, is adding to the opaqueness and unpredictability of Beijing’s economic policy, potentially increasing rather than decreasing risks associated with investing in China.
Since Beijing said late last month that it would do more to prop up the economy, many investors have found themselves on edge, fearing that they might either miss out on a rally or get sucked into a short-term pop. Some have been anxiously waiting for government briefings for any signs of additional stimulus or lack thereof.
“Investing in China used to never be like this,” says Eric Wong, founder of Stillpoint Investments, a New York-based asset manager specializing in Chinese equities. “In the past, you could just invest based on company fundamentals. Now we’re getting into such a bind guessing what they will say.”
A festering liquidity crisis
In late 2020, Xi suddenly scrapped strict Covid restrictions that left the country isolated for more than two years and badly battered the economy, after protests across China’s big cities. There was no advance warning to doctors and nurses of the abrupt policy reversal, leaving hospitals unprepared for a flood of patients.
The shift on economic policy came just as abruptly.
For the past couple of years, after China dropped its self-imposed Covid isolation, economists and investors called on Beijing to take forceful action to prop up growth—a mission more urgent after previous government intervention sapped energy out of a vast private sector and turned a property boom into a bust.
Officials in charge of day-to-day economic affairs held increasingly urgent meetings to discuss ways to address the real-estate meltdown and the immense strain on local governments running out of money.
Yet despite all that prodding, Xi had appeared determined to stay his hand.
As recently as late June, his handpicked premier, Li Qiang, who had likened China’s post-Covid economy to a patient in recovery, stressed the need to avoid using “strong medicine” to support growth.
“According to the theory of traditional Chinese medicine,” the premier said, “strong medicine cannot be given at this time. It should be adjusted accurately and slowly to gradually restore [the patient’s] foundations.” Chinese stocks tanked following these remarks.
Then, by mid-September, it became clear the economy had taken a turn for the worse. Signs of malaise were spreading.
Real-estate woes were deepening, further pushing down consumption already weakened by a gloomy economic outlook.
The jobless rate among people ages 16 to 24 kept climbing, posing a challenge to the leadership’s much-prized social and political stability. And the benchmark of mainland-traded stocks, the CSI 300 Index, was headed for an unprecedented fourth straight year of losses.
What’s more, reports were flowing into the power center in Beijing of a festering liquidity crisis across China, according to the officials and government advisers close to Beijing’s decision-making. In particular, financially strained local governments have been struggling to pay civil servants as well as state-owned and private contractors.
“There is a severe shortage of cash among local governments,” said one of the people familiar with the situation. “Something has to be done to avoid a full-blown crisis.”
But any significant action had to come from Xi, who until recently had shown few signs of worry over the economy.
By late September, the din of bad news was becoming too much even for Xi, who decided to act.
The fine print
On Sept. 24, the central bank led the charge to announce rate cuts and other steps to shore up growth and the stock market.
The breadth of the easing measures taken by the central bank surprised even some financial officials in Beijing.
Notably, Pan Gongsheng, governor of the People’s Bank of China, announced plans to set up a facility aimed at guiding commercial banks to lend to listed companies for the purpose of share buybacks.
Some analysts questioned the rationale behind the measure, as companies usually buy back stocks with their own money as opposed to borrowed funds. Nonetheless, the measure reflects Xi’s desire to revive stock trading, according to the officials and advisers close to Beijing’s decision-making.
The central-bank briefing on Sept. 24 immediately led to a surge of Chinese stocks traded both on the mainland and in Hong Kong. Wall Street firms such as Goldman Sachs Group and BlackRock upped their recommendation on Chinese equities though they cautioned they still see long-term challenges for China’s economy.
China’s state media also jumped into the fray by touting record account openings at Chinese brokerages.
For investors and analysts, the ensuing trading frenzy has become reminiscent of what became known as the “Uncle Xi bull market” of 2015, when a government push to encourage stock investing resulted in an epic stock rally in the first half of that year. A big question now is whether the gains will take hold—or turn into a crash just as the 2015 market boom did.
To that end, investors have been hanging on every word from Beijing.
An Oct. 8 briefing by Beijing’s top economic-planning agency disappointed the market with some vague pro-growth pledges but few specifics. It also laid bare the leadership’s resolve to continue aiding high-end manufacturing such as electric cars even though such industry-centric policy has led to wasteful overproduction at home and heightened trade tensions with the West.
The Finance Ministry’s briefing on Saturday reignited hopes that some sizable fiscal support is in the offing.
“The unprecedented series of press conferences by Xi’s policy team demonstrates that Xi now recognizes that China’s economy is on the wrong track,” said Andy Rothman, China strategist at Matthews Asia, a U.S.-based fund manager, “and that a pragmatic course correction is urgently needed.”
Some investors have decided not to pounce yet.
Idanna Appio, a portfolio manager at First Eagle Investments, said the New York asset-management firm, which specializes in long-term holdings, hasn’t changed its allocation to Chinese assets despite the flurry of policy moves from Beijing.
“Without measures to address the oversupply of real estate, the related debt risks and local government’s heavy reliance on the property market,” Appio said, “these recent easing efforts may not be sufficient to tackle China’s deeper economic challenges.”
For now, many of the new policy measures are less about providing direct stimulus to the economy and more about stabilizing local finances and by extension, the overall financial system and the economy.
Following its briefing two weeks ago, the central bank has set up a swap facility to allow eligible brokerages, insurers and fund managers to access highly liquid government bonds by pledging certain assets—such as stocks—as collateral.
According to people familiar with the decision-making, this isn’t a stimulus measure, but rather a derisking step.
Here, Beijing took a page from what the U.S. did during the 2008 global financial crisis, when authorities allowed investment banks and others to obtain liquidity by pledging their assets as collateral.
In China, banks can always borrow from the interbank market to stay liquid, but that market is off limits to brokerages and insurance firms. As a result, this new swap facility is intended to provide those nonbank financial firms with liquidity in the event of a crisis.
During his press conference on Saturday, Finance Minister Lan Fo’an indicated that a new round of fiscal support from the central government will be focused on backfilling local-government budget shortfalls, helping localities swap maturing debt for new borrowing, and beefing up the capital base of major state banks.
Absent from the measures are any significant moves to boost consumption. People close to the ministry say such measures are in the works but nothing substantial is imminent.
Analysts project that China’s top legislature, the National People’s Congress Standing Committee, will approve the issuance of so-called special sovereign bonds worth about $284 billion at the next meeting scheduled for later this month. Most of the bonds are expected to be used for the purpose of local-debt swaps and bank-capital injection.
The officials and advisers close to Beijing’s decision-making say the central government is putting budget constraints on some heavily indebted localities in exchange for them getting funding support from the center. While the move shows an attempt at much-needed financial discipline from Beijing, it could also lead to those localities reducing spending, potentially worsening the nation’s deflationary problems.
But a pivot is a pivot. For many analysts and investors, Beijing’s plan to rescue local governments and stabilize the financial sector is one positive step toward steadying the economy.
However, China still has a way to go before the economy stages a meaningful recovery. First and foremost, many economists have said, the power center needs to do a big U-turn on the focus of state support—from factories to households.
“China’s leadership isn’t prepared to unleash the ‘bazooka’ necessary to power a strong recovery in demand and to end deflation,” said Michael Hirson, head of China Research at New York-based consulting firm 22V Research, “but is taking important steps to stabilize growth and lower tail risks.”
