China (long-ish) Morning Missive
There’s a big meeting in Beijing next week and a meeting where expectations are being set for some sort of massive fiscal stimulus. There’ve even been some expecting a fiscal injection of 10% of GDP
Allow me to state unequivocally that there is no “bazooka”. There never was one and there never will be.
I will repeat once again, Keynes is Dead in China.
It is true that the Beijing policy Mandarins will announce an expansion of the annual fiscal deficit. Last year the target was 3.0% then raised to 3.8% at mid-year. For 2025 the expectation is around 4%.
A number of different categories of bond issuances will also be announced. A trillion or so Renminbi will be at the discretion of the central government. The bulk, however (+Rmb4.0tr), will address local government balance sheet and income statement issues. I will return to the latter of these two shortly.
This all seems like a rather significant fiscal response. Again, it isn’t. Not on a net-net basis. To start, the focus and priority remains on addressing the bad debt throughout local governments. This is pure debt restructuring and will add zero fiscal stimulus to the economy.
Then there is the one issue (income statement related) that I haven’t seen addressed anywhere in the analysis; the gaping hole in tax revenue. This is an issue for both the central and local governments. In fact, virtually all the funds which will be announced as allocations to local governments will either go to restructuring debt or as transfer payments for the direct purpose of meeting local budgetary obligations. The same holds for the elevated central government deficit spend. To clsoe the gap between expenditures and tax revenue.
The figures may be large, even when combined together, but they are net-net zero stimulative to the economy.
This does leave the trillion-plus in “Special Purpose Bonds”. I’m also confident that a proportion of the deficit spend will be at Beijing’s discretion. Here is where optionality comes into play.
Beijing is still waiting patiently to assess the full extent of how it is the Trump administration intends to target China’s economy. A fiscal reserve of sorts, roughly a few trillion Renminbi, will be kept idle and applied as is deemed needed. Until that time, however, the focus will remain on the aggressive, systemwide deleveraging of the entire economy.
Finally, not addressed is the likelihood of direct support to the Chinese household. That’s because, other than at the margins, there won’t be any. Direct to household stimulus would be completely ineffective. It would all just be recycled into bank savings. Maybe one day the credentialed class of economists will finally come to terms with their errors and adjusted their outlook on China accordingly. Unlikely at this point though.
CNBC
China likely to cut inflation outlook to two-decade low, lay out stimulus plans at 'Two Sessions' meeting
Beijing is expected to revise down its annual consumer price inflation target to around 2% — the lowest in more than two decades — from 3% or h...
