Xi Can’t Get Stimulus Cold Feet Now — It’s Too Late

(Bloomberg Opinion) — China’s most powerful stock rally in a decade rose out of desperation, but can dissipate just as quickly if met with nothing but empty words. 
As of Monday, the benchmark MSCI China and CSI 300 indices gained 36% and 27% from their recent lows after top policymakers promised a barrage of stimulus measures at the end of September before going on the weeklong national holiday. While lacking in operational details, the policy blueprints were notable in their tone and scope. The government has “revealed its ‘pain threshold,’” exclaimed Goldman Sachs Group, while upgrading its calls on Chinese stocks to overweight. 
But a high-profile briefing on Tuesday by the National Development and Reform Commission, the top economic planning body, is casting doubt on whether this is indeed Beijing’s “whatever-it-takes” moment. Perhaps just returning from Golden Week, officials sounded overly relaxed, offered no policy details, and only repeated slogans. It was antithetical to the gravity conveyed at the Politburo meeting on Sept. 26 when, for the first time since 2018, top politicians led by President Xi Jinping discussed economic matters. Boosting fiscal spending took front seat in the readout. 
Granted, it’s not the NDRC’s mandate to announce new fiscal measures — those are under the purview of the State Council or the Ministry of Finance. Nonetheless, the commission needs to ensure that big social developments, such as the green energy transition, are implemented, and that project approvals aren’t so tight that municipalities fall behind on spending.
The dearth of fiscal power is a major choke point this year. In the first eight months, local governments spent only 55.1% of their total budget, a decade low, according to Bloomberg Economics. Some urgency from the commission would have been nice. 
For the time being, investors at home and abroad are still giving Xi the benefit of the doubt. Fear of missing out prompted domestic retail traders to line up and open new brokerage accounts. Even overseas asset managers are dipping their toes in. In Hong Kong, banks have been borrowing the largest amount of cash in almost five years from the monetary authority as demand for money soars alongside the stock surge. Trading turnover in Hong Kong as well as mainland bourses are all hitting record highs. 
Investors know from the past that the surest way to make money from Chinese equities was when there were big policy pivots. After the Global Financial Crisis, Beijing’s 4 trillion yuan ($586 billion) stimulus boosted the MSCI China by as much as 147%, data provided by Goldman show. In early 2015, Xi’s shantytown redevelopment program, facilitated by about 3 trillion yuan in pledged lending from the central bank, lifted the benchmark by up to 51%. Relief packages in the early days of the pandemic yielded 84%. And last but not the least, China’s abrupt exit from Covid Zero in late 2022 gave well-timed investors a 57% gain.  
Right now, all eyes are on whether Xi’s government still has the will and the competency to realize seismic policy pivots. But investors are quick to wonder, given the lack of detail, whether there will be follow-through. NDRC’s briefing certainly disappointed, sending the Hang Seng Index 9.4% lower and threatening an unwind of the last two weeks’ rally. Having single-handedly instigated another stimulus-driven bull run, it’s almost too late for Xi to back down now. His own reputation and track record are at stake.
More From Bloomberg Opinion:
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.
More stories like this are available on bloomberg.com/opinion
©2024 Bloomberg L.P.