China's 'bazooka' stimulus is a bait-and-switch on the real economy, Plus US Republicans try revoking China's trade status -- China Boss News 10.04.24

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What happened

In his speech at a ceremony on Tuesday marking the 75th anniversary of the People's Republic of China, Chinese leader Xi Jinping urged the nation "to overcome uncertainties and risks" on the path forward.

Xi did not directly address trade conflicts with the US and Europe but emphasized China's support of globalization and Beijing's commitment to advancement.

"The path ahead will definitely see challenges. No challenges can stop China's progress," he said.

Xi's remarks coincided with a market frenzy in Chinese stocks following what analysts called a "bazooka" stimulus.

In a sudden policy reversal to restore economic confidence, Chinese officials rolled out measures, including interest rate cuts, lower mortgage down payments, and lower bank capital requirements.

Thrilled by the news, investors moved money from South Korea, Indonesia, Malaysia, and Thailand to "catch the rally," Bloomberg said. The CSI 300 index, representing major Chinese companies, soared 4. 5% last Friday and was up 15. 7% for the week, its best performance since November 2008, when the global financial crisis began.

In an op-ed, Bloomberg's Shuli Ren said Beijing's "supercharged stimulus" revealed "a technocratic shift within the government."

"It's a sign that Xi is now aware why PBOC's monetary easing has not worked," she added.

But others needed more convincing.

In 'The Big Take' update, Bloomberg analysts instead warned that the measures announced by central banker and "technocrat" Pan Gongsheng—who seemed anxious while reading the government's plans at a press briefing—were "only buying China a little time."

"Economists believe this is just a down payment if President Xi Jinping is going to pull the roughly $18 trillion economy out of a protracted slump marked by a property market blowout, consumer price weakness, and rising global trade tensions," they said.

Why it matters

Making billionaires richer

Even so, investors must have been giddy after the news that Beijing's stimulus triggered an eye-watering $17 billion surge in the wealth of French luxury house LVMH's owner Bernard Arnault in a single day, bringing his net worth to $201 billion.

The extraordinary gains came after a slide in LVMH stock as consumers worldwide, especially in China, pulled back on luxury spending.

Make of Arnault's earnings what you will. On LinkedIn, however, I hinted they were helped to gain friends in Paris by Beijing's considerable power "to yank the stock markets around" with a handful of well-timed proposals and declarations.

Should you need more persuading, read attorney Steve Dickensen's 2019 exposé on Harris Sliwoski's China Law Blog about the futility of efforts to keep personal and commercial data private under Beijing's all-seeing cybersecurity system.

In other words, in China, Beijing can easily track who has how much money and where. Recalling the adage that knowledge is power, one can safely assume that the Politburo had identified the market's winners (and losers) long before Pan's announcement. Bazooka that.

Still, the issue here is how Beijing's 'bait-and-switch' stimulus, which involves luring investors with short-term gains, risks further deflating China's economy in the long run.

While it may temporarily boost stock market performance, if policymakers can't deliver broader economic growth driven by demand rather than supply, smart money will again look towards the exit.

Technocrat, schmucknocrat: "No will, no power."

Contrary to popular wisdom, sudden announcements from "China's overrated technocrats"—as James Palmer, Deputy Editor at Foreign Policy, once called them—are no salve for the country's deeper malaise.

That is to say that stubborn challenges, like a lack of consumer demand and a devastated property market, are not something Beijing can "pump and dump" away.

Experts have been pleading with Beijing's decision-makers to consider providing direct stimulus checks to consumers while they work to deepen economic reforms.

But Beijing's willingness to shake its pom-poms to stem foreign capital outflows—which recently surged to their highest level since 2016—doesn't translate into an overhaul of macroeconomic policy.

Last week, Business Insider's Linette Lopez focused on the underlying institutional reasons why China's leaders cannot rise above market tinkerings.

Lopez argued that Xi's Beijing lacks the will to revive China's economy because he's "ideologically opposed to jump-starting consumer spending with direct stimulus checks" and prefers individuals to strive to earn their keep.

From his perspective, the money could also be put to much better use, achieving narrow state goals, like subsidizing technological development.

"As for the power, Goldman Sachs estimated that returning China's apartment inventory to 2018 levels would require 7.7 trillion yuan. China's property market is so overbuilt and indebted that the trillions in stimulus needed to fix the problem — and make the local governments that financed it whole again — would make even a rapacious fundraiser like OpenAI CEO Sam Altman blush," Lopez said.

Ironically, those same local governments have also been sounding alarm bells over the loss of investment to Southeast Asia, the US, Mexico, and India.

The South China Morning Post (SCMP) reported last week that local leaders in a well-to-do city in Zhejiang, a "regional manufacturing powerhouse," conducted a survey of leading local companies to determine their investment plans in order to address “the trend of offshoring and prevent the risk of hollowing out of [Chinese] industries.”

The survey revealed that many enterprises in Nanhu, Jiaxing district, are investing overseas, particularly in Southeast Asia and the United States, for low-end and high-end manufacturing. Some companies are offshoring to Mexico to mitigate the impact of US tariffs. The report also noted the growth in investments in India to acquire advanced technologies.

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The Big Story in China Business

US REPUBLICANS SEEK TO END CHINA'S NORMAL TRADE STATUS: Nikkei Asia reported that Republicans in the U. S. Congress last week introduced a bill to end Permanent Normal Trade Relations (PNTR) with China, citing imbalanced trade between the two largest economies.