2024-02-08 13:23:20
Following the economic shuffle in which China found itself during the past year, the country’s authorities began to start growth engines that will try to pull it out of the mud. Meanwhile, the markets seem to like it. On Tuesday of this week, China’s stock indices jumped sharply: the Shanghai index rose by 3.2% and the CSI 300 rose by 3.5%, the biggest daily jumps since 2022. At the same time, the indices in the stock market are still showing a decline since the beginning of the year, following the steep declines during 2023.
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As part of the steps to stabilize the economy that the government in China committed to at the beginning of the year, last week the central bank announced the lowering of its reserve ratio required by the banks by 50 basis points. This is the amount of cash that a bank must hold, against which it can lend credit to its customers, so lowering the ratio means that a bank can lend more credit, an estimated trillion yuan ($140 billion), in the hope that the general public and businesses will use these loans for consumption, to buy apartments, and in general to stimulate the economy .
At the same time, last month it was announced that China is considering a 2 trillion yuan ($280 billion) incentive to buy shares on the stock exchange, after the leading index of the Shanghai Stock Exchange weakened by 13% in the past year.
What may dispel some more fog is China’s inflation data, which will be released on Thursday. The price level in China has been negative (deflation) for several months now, while the forecast for the next index is the continuation of the declines (a decrease of half a percent, compared to 0.3% – now). The price drops in China point to the weakness of private consumption and best indicate the crisis in which Chinese society is.
“Consumers don’t buy”
The economic difficulties join the demographic difficulties. According to China’s Central Bureau of Statistics, in 2023 the country’s population will decrease by more than 2 million people and the trend is not expected to change. This, at the same time as the problem of unemployment among young people (in some areas it reaches 25%) and poor consumer confidence. Beyond that, fear of a security flare-up following China’s desire to annex Taiwan is also expected to affect China’s economy and drive investors away from it, who also do not trust the government.
“The Chinese economy has weakened. It has several major problems, including the real estate sector, huge debt problems, private consumption that has not increased and the stock markets that have been falling sharply in recent months,” says Einat Meir, a macro and markets analyst at Discount Bank. Last month, the court in Hong Kong ordered The Evergrand company, the real estate giant that carries huge debts of 300 billion dollars and stopped paying its debts more than two years ago, ‘liquidated’.
The problem of the domestic debt, which has reached 13 trillion dollars, also oppresses the government. Meir explains that “the debt came through credit loans from private sector companies and local authorities, so it is not from the Chinese government itself, which means the party can stand behind it but it can’t.” The State Council recently ordered a number of highly indebted municipalities to halt expensive infrastructure projects, but has yet to take any real steps to address the high debt.
Dr. Gil Bafman, Bank Leumi’s Chief Economist explains that the key question is whether the recent moves will indeed substantially improve growth. According to him, “reducing the reserve ratio may lead to an increase in credit, but similar moves in the past occurred in combination with the weakening of regulatory controls and the increase in risks. The limitations on the banks’ ability to provide loans have historically been the main constraint on bank loans in China.” Bafman points out that unlike in the past, credit has recently been adversely affected mainly by the weakness of demand.
Meir points out that a half percent reduction in the reserve ratio is not out of the question, but “this is an acceptable step that the Chinese government uses frequently.” And in any case, she emphasizes, there is no certainty that the move will benefit the economy, “since the Chinese economy suffers from a lack of demand for credit, consumers are not buying and therefore the move will not help the Chinese economy that much.” It also cools the announcements about the infusion of money into the stock market. “Right now it’s mostly a rumor.”
The central bank is cautious
Meir describes a mechanism of “gas and brakes” by the Chinese authorities towards the economy: “Every time there is a possibility to reduce the reliefs, in light of the awareness of the high debt, China puts ‘brakes’ and stops them.”
Bafman emphasizes that the government’s moves in China have not been aggressive so far, mainly due to the fear of destabilizing the exchange rate, an issue that has received explicit attention from the authorities. We saw an example of this recently, when the Chinese central bank decided to avoid monetary easing and left the Chinese central interest rate (LPR) at 3.45%. This, after many in the market expected that the central bank would announce the lowering of the interest rate at the beginning of 2024, after it had already decreased twice during the year 2023, but only moderately.
According to Bafman, the cautious move in the monetary field reflects the understanding that China’s current economic weakness “has structural roots, and credit expansion by itself will only provide temporary relief, at the cost of increasing financial risks.” Meir points out that the market is mainly waiting for steps from the government, not the central bank.
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