China Fights Its Doom Loop | Leland Miller on Mammoth Stimulus From People's Bank of China
Sep 28, 2024
auto_awesome
Leland Miller, co-founder and CEO of China Beige Book, provides sharp insights into China's recent market rally driven by central bank stimulus measures. He analyzes how these moves may stabilize rather than stimulate the economy. The conversation also covers the challenges facing the credit market, including rising delinquencies and the troubled real estate sector. Miller highlights the concerning decline in Chinese startups and the effects of trade wars on the semiconductor industry, painting a complex picture of China's economic landscape.
China's recent stimulus measures aim to stabilize the stock market but may not effectively enhance overall economic performance.
Consumer and corporate confidence remains crucial in determining the success of lower interest rates on borrowing and investment.
Strategic efforts to support the real estate market focus on mitigating risks without encouraging unsustainable growth patterns.
Deep dives
China's Policy Response to Economic Challenges
China is implementing significant policy measures from its central bank and government to address economic difficulties and stabilize the stock market. These measures include a reduction in interest rates and cuts to the reserve requirement ratio, which are intended to inject liquidity into the financial system. The excitement surrounding these policies is evident, as there are discussions about establishing borrowing facilities and a market stabilization fund to support equities. However, an important distinction is made between the performance of the stock market and the broader macroeconomic health of the country, with the two often operating independently of each other.
The Disconnection Between Asset Markets and the Real Economy
Historically, China's stock market trends have been largely uncorrelated with its macroeconomic performance, with instances of GDP growth occurring alongside a declining stock market. The current measures taken by the People's Bank of China have led to decreased interest rates, aimed at boosting borrowing; however, this has not resulted in higher demand for loans. The ongoing lack of consumer and corporate confidence remains a significant barrier to stimulating borrowing, as firms are hesitant to commit to new investments even with lower rates. This sentiment issue indicates that government interventions may be ineffective at generating the desired economic momentum without broader confidence in the market.
Challenges Facing the Real Estate Sector
The Chinese government has committed to supporting the real estate market but has been careful not to encourage a substantial recovery that could inflate the existing property bubble further. The sector remains under stress as it was identified as a major area of risk and misallocation of credit, leading to a significant deleveraging process initiated by the Chinese Communist Party. Despite efforts to stabilize expectations and prevent a catastrophic market failure, it is clear that authorities do not seek to restore the real estate sector to its previous status as a growth engine. Instead, the focus remains on minimizing vulnerabilities within the economy that could threaten overall fiscal stability.
Economic Growth Outlook and Government Priorities
The current condition of China's economy reflects a mix of slow growth without imminent collapse, differentiating it from forecasts of a significant economic crisis. Analysts suggest that while the economy is not performing well, it is also not experiencing a breakdown, indicating a period of adjustment rather than calamity. The government's strategic focus appears to have shifted from maintaining high growth rates to ensuring stability and addressing national security concerns, such as advancing technology independence. By prioritizing structural reforms and targeted sectors, the Chinese leadership aims to mitigate the impact of external pressures while guiding the economy toward more sustainable growth patterns in the long term.
Implications of U.S.-China Trade Relations
The ongoing trade tensions between the United States and China are anticipated to intensify, regardless of future U.S. administration changes. Trade controls concerning semiconductors and other strategic sectors are likely to remain pressing issues, leading to significant economic ramifications both domestically and internationally. As China aims to maintain its dominant export position, this could trigger retaliatory measures affecting a broad range of industries globally. This environment fosters uncertainties for foreign firms operating in China, as consumer preferences increasingly favor domestic over foreign products in light of geopolitical tensions and nationalistic sentiments.
China’s central bank just shocked markets with several impressive sounding stimulus measures, causing the biggest one-week rally in Chinese stocks since 2008. But how effective is this stimulus actually going to be to the Chinese economy? Leland Miller, co-founder & CEO of China Beige Book, joins Monetary Matters to weigh on this very important issue. Leland says he thinks the rally in Chinese stocks could continue for up to two months but that the effect on the Chinese economy will be to stabilize rather than to stimulate. Recorded on September 27, 2024.
