Beijing shifts stance on economy, but words alone won’t be enough
Summary
- Markets might hope for a stimulative silver bullet from Beijing, but the reality is more complex.
In recent months, Chinese stock markets have been whipsawing between hope and uncertainty, as the market attempts to read Beijing’s tea leaves for signs of an economic lifeline. While new hopes are emerging, investors should be careful not to get carried away.
The latest spark of optimism came from the Politburo, the top decision-making body of the Chinese Communist Party. In a readout of its meeting, the use of the phrase “moderately loose monetary policy" got the market looking forward to a potentially big rescue. Such language was last used in the aftermath of the global financial crisis and hasn’t been heard since 2011. The meeting also pledged further support to consumption and the housing market. A new term of “unconventional countercyclical adjustments"—whatever that means—adds to the hope.
The statement triggered a late-session rally that lifted the Hong Kong market around 3% higher Monday, erasing earlier losses. However, the initial enthusiasm quickly began to wane, with the market closing lower on Tuesday.
Some caution is indeed warranted. The Hang Seng Index jumped as much as 27% between late September and early October when the government signaled that it will be more assertive in fixing the economy. Yet lack of details on big stimulus, especially to boost consumption, means more than half of those gains have been wiped out.
While markets might hope for a stimulative silver bullet from Beijing, the reality is more complex. As Nomura’s economists pointed out, China’s economy isn’t in a normal downcycle and it would take more than just monetary easing or limited fiscal stimulus to kick-start it again.
“To deliver a real recovery in 2025, Beijing may have to clear the property market, fix its fiscal system, repair the social welfare system and ease geopolitical tensions," they said.
Needless to say, fixing all of these together isn’t an easy task and will certainly take time. Beijing is indeed moving to solve some of these problems—it recently approved a $1.4 trillion package for the central government to take on the debts of the local governments. But bolder measures to stimulate consumption will still be needed as the collapse of China’s housing market has created a dangerous feedback loop: Consumers have tightened their purse strings, leading to lower prices and reduced corporate profits, which in turn push prices lower. That risks sinking the economy into a deflationary spiral. New tariffs from U.S. President-elect Donald Trump would only add to Beijing’s problems.
November’s inflation data underscores these challenges. Consumer prices grew a meager 0.2% year-over-year, missing consensus expectations. Factory-gate prices continued their 26th month of decline.
As Chinese leaders prepare to meet for their annual economic conference, which should kick off in the coming days, markets wait with bated breath for more good news. But the gathering traditionally yields more of a policy signpost than a detailed road map.
While Beijing’s rhetoric may offer direction, investors will need more than just hopeful signals to chart a clear path forward.
Write to Jacky Wong at jacky.wong@wsj.com
