This time is not different for China

Summary

High profile policy announcements from China have captured financial markets' attention over the past few weeks. China's central bank eased monetary policy, while the Ministry of Finance deployed fiscal resources to aid the property sector and local banks. However, with few fiscal resources deployed toward supporting broader domestic demand, we don't think the growth impact of the latest stimulus announcements will be any different for China. We believe that utilizing the policy support playbook from the last fifteen years will not be enough to change China's short or long-term economic trajectory, and that policy measures that are not aimed at generating consumer spending will ultimately fall short of authorities' intentions. China's economy, in our view, is still staring down at annual GDP growth in the 4.5% range for the next few years. We also expect the recent burst of market optimism around China to fade, and a range of systemically important emerging market nations could be at risk of sentiment swings. With China's policy support announcements missing the mark, combined with a Federal Reserve taking a more gradual approach to easing, 2025 could be a year defined by significant emerging market currency depreciation.

The time has come for China to change

Chinese authorities have now hosted two highly publicized stimulus announcements over the past few weeks. The announcement in September was particularly focused on easing monetary policy, but also other actions designed to help China's economy achieve the government's 5% growth target. This past weekend, China's Ministry of Finance (MoF) followed up September's announcement with a stronger effort toward economic support. The latest policy support is more centered around fiscal stimulus. China's Finance Minister communicated a willingness to take on more debt and expand government fiscal deficits (general and local), allowed for greater usage of local government bond issuance proceeds, dedicated support to China's local real estate sector and offered additional support to local governments to recapitalize bank balance sheets. While details of MoF stimulus are still somewhat vague, Chinese authorities are once again adjusting policy settings in a more accommodative direction in an effort to support China's economy. The shift to policy accommodation is notable. Essentially since the Global Financial Crisis in 2008-2009, Chinese authorities have attempted to balance supporting economic growth with reducing financial stability risks. This balance has been a challenge that has seen authorities at times dip into stimulus by allowing increased leverage, and at other times aim to deleverage by sacrificing economic growth. For the most part, authorities have leaned in favor of supporting activity, which has seen system-wide debt rise significantly over the past fifteen years. Following a brief period of striving for deleveraging post-pandemic, authorities are now clearly more committed to sparking growth than deleveraging China's economy, again opening the tap to policy support, both monetary and fiscal. Historically, Chinese authorities flipping to stimulus has supported growth and led to China's economy being one of the largest single contributors to global GDP growth.

Download the Full Report!