China is going through a moment of great doubt for investors. The country has entered official deflation, with the general CPI at an annualized rate of -0.3%, with the real estate market declining and with the drop in exports compared to the expected figures. To this we must add that its manufacturing industry is in contraction –the last reading of the manufacturing PMI was 49.3–, while the service sector is advancing towards a downward trend.
International investors fleeing China have a simple message for the country’s leaders: put prudence aside for a while and start stimulating its economy as much as possible. Or, put another way, that they implement spending policies even greater than those they executed to get out of the 2008 crisis because the private debt burden begins to be heavy.
Investors appear to be growing impatient with what they believe to be slow, inconsistent and pyrrhic on the part of China’s management. The fear is that the deepening real estate problems could generate a much more robust drop in activity in the economy than previously expected. For this reason, rapid action is the most demanded by operators at the moment.
Modest interest rate cuts and vague promises of help to indebted property developers have failed to restore spirits, and fund managers are adamant: They need to see more public money flowing before they consider turning back, as public. . aba Reuters these days.
“Right now there is confusion, and as long as there is confusion, there will be a lack of credibility, which means investors are more likely to stay away,” Seema Shah, chief global strategist at Principal Global Investors, told the news agency. “The only way out is to intensify fiscal stimulus… Because there is a lack of confidence, rate cuts are not doing enough to boost credit demand,” she adds.
In Beijing’s next roadmap could be a sharp increase in spending or rapid intervention, such as the one it carried out during the 2015 market crash. And it is that on the wish list of every investor is, first of all, that the Chinese government spend again, regardless of the risk of increasing debt. Most analysts believe that the economy needs much more than the 4 trillion yuan that China pumped into the great financial crisis of 2008, and that it should go to local governments and banks.
“Although China has promised to do more to support the depressed real estate sector and consumer spending, even at the July meeting of the Politburo, China’s highest political decision-making body, it has not put the money to work,” they comment from JP Morgan in a recent note distributed to its institutional investors.
For now, the Xi Jinping administration has promised subsidies to consumers who spend on electric vehicles, electronics and tourism. This could have a much better impact than implementing a direct tax that could be saved rather than spent.
However, this aid package must come from local administrations. Some municipalities that, in some cases, are drowning in debt or do not have enough liquidity to pay the salaries of their officials. And here is one of the problems that have to be reversed with these stimulus plans that investors are looking for like rain in May.
Some analysts such as Frederik Ducrozet, head of macroeconomic studies at Pictet Wealth Management, tell Reuters that local governments should be allowed to issue bonds quickly, pointing out how the Chinese government and provinces have raised considerably less cash this year than in 2022: “For to have a significant impact, to be a game changer for the economy, I think they will have to raise multiples of that amount.”
Thus, local administrations and their financing vehicles play a key role in financing infrastructure projects, which have normally been one of the biggest drivers of growth in the economy.
Less tax on the bag
Another of the great stimulus measures that the Chinese government has applied has to do with attracting investment capital. That’s why Bloomberg reported that the country cut the tax on stock transactions for the first time since 2008, in a major attempt to restore confidence in the world’s second-biggest stock market.
The rate that taxes stock market operations was reduced by half since last August 28, according to the Government in a statement on Sunday. Since the government of the Asian country last month promised to “make capital markets more consistent and boost investor confidence”, the world markets have been filled with expectation. It is a stone in the road that disappears.
According to Bloomberg, the authorities are trying to attract back investors who have lost interest in the country’s assets as worrisome signs in the economy increase, from the fall of the real estate sector and the weakness of consumption indicators. Foreign investors sold China shares on net for 13 consecutive sessions up to Wednesday last week, marking the longest streak in history. Steps toward weathering the storm are already being taken.