Short Read: A Stimulus Is Good, But China Still Faces a Hard Slog

Over the past two weeks, the Chinese stock markets have been on a tear with benchmark indices rallying over 30%, also resulting in China’s weight in emerging market indices bouncing after a steady decline. The reason being a bazooka of a stimulus announced last week. The size of the stimulus is in someways an acknowledgement by the Chinese authorities of the dire economic situation. Investors are piling into the rally – David Tepper said he would buy ‘everything’ in China.

“An “anything but China” mantra has been supplanted by “all-in, buy China,” Louis-Vincent Gave of Gavekal Research wrote in a note on Tuesday.”

Whilst investors are excited, western media is circumspect as this article in the Bloomberg suggests.

“The Chinese Politburo wrapped up last week by pledging action to make the real estate market “stop declining.” Did the highest decision-making body mean for a month, for a year, or forever? And how will that be measured? We may have to settle for recognizing success if, and when, we see it. The specter of deflation has followed China for a while, so lifting overall demand can’t hurt on that score. But without an inflation target, it’s hard to exactly know the destination. Beijing hasn’t declared a 2% goal like the Fed or ECB, but a former governor of the People’s Bank of China has spoken of the desirability of such a pace.

Also important to remember is that targets can be changed. Boosting gross domestic product by around 5% in 2024 doesn’t guarantee future success. When that number was unveiled earlier this year, it was described as ambitious. When a similar task was set 12 months earlier, it was criticized as too conservative. The reality is that China was in a long-term slowdown well before the pandemic, a trend that will continue. The bigger an economy gets, the harder it is to keep growing at anything like the pace China did in the 1990s and during the first decades of this century. Part of the excitement the past few days is for a China that is somehow back. But that type of turbo-charged expansion won’t return.

PBOC chief Pan Gongsheng hasn’t assured, as Draghi did, that his steps will be enough. That’s wise. The euro region still had some difficult times ahead of it in 2012. We now know that China cares enough about what ails its economy to mount a policy offensive. There’s still a lot of work to be done — and some concepts to be solidified. As positive as the new initiatives are, China faces a slog.”

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