China stimulus calls are growing louder, at home and abroad

BEIJING – A growing number of economists are calling on China to stimulate economic growth, including domestic growth.

China should issue at least 10 trillion yuan ($1.42 trillion) in ultra-long government bonds in the next year or two for investment in human capital, said Liu Shijin, former deputy head of the Development Research Center at the State Council, China's top executive Body.

This is based on Mr. Liu’s Chinese language theory translated by CNBC on the financial information platform Wind Information.

The title of his speech at the China Macroeconomic Forum at Renmin University of China on Saturday was: “A package of stimulus and reforms to significantly expand the economic revitalization plan for domestic demand.”

Liu said China should make greater efforts to address the challenges faced by urban migrant workers. He stressed that Beijing should not take the same stimulus measures as developed economies, such as simply cutting interest rates, because China has not yet reached that level of slowdown.

The world's second-largest economy still faces pressure from a housing downturn and tepid consumer confidence after a disappointing recovery from the Covid-19 pandemic last year. Official data over the past two months also showed slower manufacturing growth. Exports are a rare bright spot.

Goldman Sachs earlier this month joined other institutions in lowering its annual growth forecast for China to 4.7% from a previous estimate of 4.9%. Analysts said in a Sept. 15 report that the cut reflected recently released data and the delayed impact of fiscal policy relative to the company's previous expectations.

Goldman Sachs analysts said: “We believe the risk that China will fail to achieve its full-year GDP growth target of 'around 5 percent' is rising, so is the urgency for more demand-side easing measures.”

China's much-anticipated July 3 Central Committee plenum largely reaffirmed existing policies while saying the country would work hard to meet full-year targets announced in March.

Beijing announced a more targeted plan at the end of July to stimulate consumption through trade-in subsidies for upgrades of large equipment such as elevators.

But some businesses say the measures have yet to have a meaningful impact. Retail sales increased by 2.1% year-on-year in August, one of the slowest growth rates since the country recovered from the epidemic.

In the past two years, China has also introduced a number of progressive measures to support the real estate industry, which once accounted for more than a quarter of the Chinese economy. However, the real estate market continues to be sluggish, with related investment falling by more than 10% in the first eight months of this year.

“The big picture in the room is the real estate market,” said Xu Gao, chief economist at Bank of China International in Beijing. He was speaking at an event last week organized by the Center for China and Globalization, a Beijing-based think tank.

Xu said the demand from Chinese consumers is there, but they don't want to buy properties because of the risk of not being able to deliver the homes.

Apartments in China are often sold before they are completed. Nomura estimates that about 20 million such pre-sale units remain unfinished by the end of 2023. Earlier this year, buyers in such projects told CNBC they had been waiting eight years to get their homes.

To restore confidence and stabilize the property market, policymakers should bail out property owners, Xu said.

“Current policies to stabilize the real estate market are clearly not enough,” he said, noting that the industry may need 3 trillion yuan in support, compared with the approximately 300 billion yuan announced so far.

China’s top leaders have placed greater emphasis on strengthening the country’s capabilities in advanced manufacturing and technology, especially amid increasingly tight U.S. restrictions on high technology.

Gabriel Wildau, managing director of U.S.-based consulting firm Teneo, said in a report earlier this month that “although the Politburo meeting at the end of July indicated the intention to upgrade policy stimulus, the extent of the upgrade will be gradual. .

“Senior leaders appear content to struggle to meet this year's GDP growth target of 'around 5 per cent', even if that is achieved through nominal growth of around 4 per cent plus deflation of around 1 per cent,” he said.

In early September, Yi Gang, the former governor of the People's Bank of China, said in rare high-level public comments that leaders should “focus on combating deflationary pressures” through “active fiscal policies and loose monetary policies.”

However, Wildau said, “Yi Jianlian has never entered the inner circle of China's top economic policymakers, and his influence has further waned since his retirement last year.”

China's latest reports on retail sales, industrial production and fixed asset investment showed weaker than expected growth.

Lu Ting, chief China economist at Nomura Securities, said in a report on September 14, “Despite the surge in government bond financing, infrastructure investment growth has slowed significantly as local governments are constrained by tight fiscal conditions.”

“We believe the Chinese economy may face a second wave of shock,” he said. “Conventional monetary policy is stretched to its limits under these new shocks, so fiscal policy and reforms should take the lead.”

China's central bank kept one of its key benchmark interest rates unchanged on Friday despite expectations that a rate cut by the Federal Reserve earlier this week could support further easing of monetary policy in China. Fiscal policy has so far been more restrained.

“We believe Beijing should provide direct funds to stabilize the property market as the housing crisis is the root cause of these shocks,” Nomura’s Lu said. “Beijing also needs to increase transfer payments (from the central government) to alleviate the burden on local governments. financial burden before long-term solutions can be found.”

According to official reports, China's economy still grew by 5% in the first half of the year. Exports in August increased significantly by 8.7% compared with last year, exceeding expectations.

“In the short term, we have to really focus on making sure we successfully achieve this year's 2024 growth target, which is about 5%,” Zhu Guangyao, former deputy finance minister, said at a Center for China and Globalization event last week. “We remain confident that we can achieve this goal.”

When asked about China's financial reforms, he said the focus was on budgets, local fiscal reforms and the relationship between central and local governments. Zhu noted that some government revenues were lower than expected.

But he stressed how China's Third Plenum was focused on long-term goals, which he said could be achieved through GDP growth of 4% to 5% annually over the next decade.