China will come up with more Stimulus but not much of help

 

China will have to come up with several more stimulus and the current ones are just the beginning. All these stimulus packages of China are not to uplift the falling knife of its capital market but to safeguard its banks and institutions. These are not stimulus, rather these are bailout packages. There is an underlying difference between bailout packages and stimuli where the latter is to be given to society and the former is saving the fall.

We have heard the debate that the Chinese market is cheaper and more attractive in terms of valuations. Well, there is a difference between journalism and ones who understand economics. Every cheap can be cheapest and even the cheapest might remain less lucrative.  The structural base of China is fragmented and shattered and needs more reforms than just having a 10% jump in the capital market. What the world or today's investors want is sustainable growth and not fluke growth on investments.  China had an enormous hidden debt balance of 14.3 trillion yuan ($1.99 trillion). Officials aim to slash that amount to 2.3 trillion yuan ($320 billion) by 2028.

The stimulus measures of China are unlike in previous full-bore stimulus programs, for instance in 2008 and 2015, the aim today is not to engineer a boom but simply to halt the deterioration in economic conditions evident in the past few months, and stabilize growth in around the target of 5 per cent. The economy is trying hard to shift from real estate to technology-driven growth and that’s too being independent.

 Currently, China needs to stimulate growth and combat deflation, which has become a stubborn problem in China. Those efforts would require much more aggressive policies, far beyond debt swaps.

Youth unemployment in China ticked up to 17.1% in July, official figures showed, the highest level this year as the world's second-largest economy faces mounting headwinds. Now when an economy has huge unemployment it means business investments are next to zero and business confidence is also negligible. Well, macro numbers can be cooked but the underlying interconnect economic truth cannot be hidden.

China is battling soaring joblessness among young people, a heavily indebted property sector and intensifying trade issues with the West. China's economy has been struggling, and the country has lost 36% of its billionaires since 2021. On the other hand,  The government has cracked down on the super-rich and restricted the property market.  Further, the way the Chinese government have come up on the neck of investment bankers and wealth managers speaks loudly that China's financial market will not surge as expected. The detentions of investment bankers and regulatory probes are also raising questions about the future of China’s $1.7 trillion brokerage industry and domestic capital-markets activities, which have already slowed sharply while the broader economy sputters.

  

The financial sector is saddled with non-repayment of financial investments done by Chinese people in real estate-borne products. Hence investing in equities by its own people is lacklustre.  Don’t forget that people invested in real estate, which makes up about 70 per cent of China’s household assets.  Further overall food inflation climbed 3.3% in September from a year ago, while the cost of fresh vegetables surged 22.9% after gaining 21.8% in August.  The ageing population leaves less opportunity for earning and hence savings are more important after the real estate investment fiasco.

The financial markets cannot fix the fundamental and long-term issues China faces. The proportion spent on food rebounded to 31% in 2022 from 28% in 2019, reversing a downtrend since 1990. After China reopened in 2023, sales growth in consumer staples declined as sales of non-durable discretionary goods bounced back.

Few macro data portray wrong messages just like this one where the number of travellers has surged during holidays, but tourism spending per capita has remained around 80%-90% of 2019 levels, and services consumption growth is slowing so far in 2024. The loss of high-income jobs after Beijing’s campaigns against the property sector, online platforms, education technology, video games, medical, and financial sectors hit these households disproportionately.

Further China’s state-owned financial institutions have capped annual pay for senior staffers at 2.9 million yuan ($400,000), while recent pay cuts for onshore bankers at China International Capital Corp. have been as much as 25% of their base salaries. 

Forget about Mr. Trump’s proposal of a 60% tariff, the more concerned will be now about how hard he gets on throwing the investments and companies of China out of U.S. land. China Holdings of US Treasury Securities data was reported at 774.600 USD bn in Aug 2024. This used to be trillions 10 years before and now the same is in billions.

Going ahead in 2025 you will witness more government initiatives from China to protect from Mr.Trump and also to attract Chinese people and foreign institutions to invest in the capital market rather than investing in real estate projects. But this transition will not be smooth post-Mr. Trump coming as President.