As Chinese stocks get their groove back, markets are grappling anew with tension between President Xi Jinping’s long-term policy priorities and investors’ hunger for short-run stimulus.
The conflict between the long and short views is nothing new. For decades, the “Washington Consensus” gang has advised Beijing to recalibrate its unbalanced economy, which free market advocates see as too reliant on giant, opaque state-owned enterprises and the vast subsidies that sustain them.
But Xi’s efforts to do just that have often collided with anxious investors who seem increasingly unwilling to give Beijing the space needed to get under the hood and overhaul its US$17 trillion economy.
Until now, perhaps. Over the weekend, the friction between Team Xi and impatient markets was on stark display.
On Saturday (October 12), Xi’s Ministry of Finance (MOF) held an unscheduled press conference that had markets buzzing about a possible huge new stimulus jolt to ensure China hits its 5% economic growth target for 2024 and fresh steps to combat increasingly entrenched deflation.
When MOF focused on broader reform themes and declined to offer a specific price tag on the dangled stimulus, futures markets slid. Yet by Monday, stocks rose.
Investors concluded that even if Beijing isn’t deploying its massive stimulus “bazooka,” the MOF’s latest statements reflect the pragmatism markets have long-craved from Xi’s inner circle.
Economist Harry Murphy Cruise at Moody’s Analytics said the weekend announcement “ticked most of the right boxes, but it lacked detail on the scale and scope of new spending,” noting that “we expect more supports to be announced through the remainder of the year.”
Economist Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, says, “these policies are in the right direction.”
Even after the recent rally, a buoyant bounce from the US$6.5 trillion rout dating back to 2021, there’s a valid argument that Chinese stock valuations are now fairly valued. Indeed, Chinese shares are now trading at far lower multiples than those seen in the US, where new market highs are being recorded by the day.
“Despite no large fiscal stimulus number, the MOF press conference was still an upside surprise to us,” explains Jing Liu, an economist at HSBC Holdings. “The policy pivot looks very much here to stay, with the improving risk appetite creating a wealth effect in both the stock and property markets.”
Odds are, though, that this is a trust-but-verify moment for markets. To some extent, bullish investors are reacting to Beijing’s hints of more support to come for the crisis-plagued property sector and highly indebted local governments with new, targeted fiscal-spending jolts.
The incentive for more stimulus is rising. In September, Chinese exports and imports came in weaker than expected, raising new doubts about the economy’s main bright spot. Overseas shipments, for example, rose just 2.4% year on year, a sharp fall from August’s 8.7% increase.
Economist Zichun Huang at Capital Economics says that “further ahead … growing trade barriers are likely to become an increasing constraint” on export and economic growth.
Though the shift toward lower interest rates from Washington to Seoul may increase demand in spots among China’s key trading partners, economists note, political curbs on goods like electric vehicles and other green technologies are generating fresh headwinds.
To a bigger extent, though, punters are starting to realize that Xi’s inner circle is almost linearly focused on catapulting China into the so-called Fourth Industrial Revolution by accelerating the shift upmarket into high-value technology-driven industries.
Though annual growth targets matter in the short run, Team Xi is more interested in the longer-term prize of tech-driven economic reinvention and domination of the industries of the future.
With these caveats in mind, investors are delving deeper into Chinese stock valuations versus other top global markets and sensing new value.
In the most recent Global Risk-Reward Monitor newsletter, Asia Times business editor David Goldman argues that with a price-earnings (P/E) ratio of 11, China’s stock market “is a bit too low.”
But at the same time, he notes, “there is no reason to expect Chinese valuations to approach the S&P (500’s) valuation of 22 times (forward) earnings.”
One reason, he argues, is that China’s government has gone out of its way to prevent and reverse the formation of market-skewing tech monopolies like Google, Microsoft or Amazon.
“No surprise, then, that Alibaba trades at a P/E of 27 after the run-up of the past month, versus Amazon’s 43,” Goldman writes. “We have long argued that China’s equity market valuation was too low given subdued but steady economic growth. After the past month’s rally, the valuation of the Chinese market seems more reasonable in comparison to the United States.”
That’s not to say Beijing isn’t cognizant of the moment’s sensitivity. In a note to clients, economists at Morgan Stanley say this moment represents “Beijing’s second chance to convince the market” after a rough several days.
Yet Xi may have found the happy medium between displaying a willingness to roll out more stimulus while also exercising restraint.
“The latest round of China stimulus clearly indicates that policymakers have made a turn on cyclical policy management and increased their focus on the economy” without overdoing it, says Hui Shan, an economist at Goldman Sachs.
The US investment bank now estimates China will expand 4.9% this year, up from an earlier estimate of 4.7%. For 2025, Goldman Sachs sees growth of 4.7%, up from an earlier 4.3% forecast.
One source of Goldman Sachs’ optimism: MOF officials plan to deploy 2.3 trillion yuan ($325 billion) of special local government bond funds in the fourth quarter of this year.
This, Hui says, suggests a more “back-loaded” public spending plan, paving the way for a bigger rebound than his bank had previously expected.
Last week, China’s National Development and Reform Commission announced pre-approval of 200 billion yuan ($28.2 billion) worth of 2025 investment projects. Hui’s team sees it as a clear government effort to ensure China reaches this year’s 5% GDP target.
Carlos Casanova, economist at Union Bancaire Privée, notes that investors are taking solace in Finance Minister Lan Fo’an highlighting that officials have a “fairly large” capacity to increase spending if needed.
That includes, Casanova says, “implementing some of the most ambitious measures in years aimed at reducing local governments’ debt burdens, revitalizing the struggling property market, and recapitalizing large banks – each of which is crucial for addressing China’s ongoing structural challenges.”
However, Casanova adds, “the timeline for fiscal measures remains uncertain. Significant announcements may need to wait until the upcoming National People’s Congress Standing Committee meeting, scheduled for late October or early November.”
Economist Shirley Ze Yu at the London School of Economics says that the MOF “has given as strong a signal as possible while waiting for the NPC approval.”
Larry Hu, chief China economist at Macquarie Capital, doubts that Xi’s policymakers will get too specific about dollar amounts.
“First, they don’t need to come up with such a number for the NPC to approve,” Hu says. “Second, it’s hard to come up with such a number, as the line between fiscal, monetary and industrial policies is often blurred in China.”
Yet, Hu adds, it would run counter to Xi’s deleveraging goals to flood the economy with stimulus the way Beijing did in 2008 and 2009 amid the global financial crisis.
Hui at Goldman Sachs says investors will be keenly focused on Beijing’s implementation of structural reforms.
“The ‘3D’ challenges – deteriorating demographics, a multi-year debt deleveraging trend and the global supply chain de-risking push — are unlikely to be reversed by the latest round of policy easing,” Hui argues.
But economist George Magnus at Oxford University’s China Centre can’t help but worry Beijing might continue to employ policies that haven’t worked before.
“A solution would involve the sustainable expansion of the income and consumer demand shares of the economy, an end to deflation risk, more income redistribution, the promotion of private enterprise, and extensive tax and local government reforms,” Magnus writes in an op-ed for The Guardian.
Magnus adds that “Xi’s more Leninist agenda emphasizes supply and production, and what he calls ‘high-quality development,’ which is essentially about state- and party-led industrial policies to allocate capital to lead and dominate modern science, technology and innovation in the global system.”
There’s “no doubt that China already has and wants to expand advanced industrial expertise and leadership in some key firms and sectors,” Magnus says. “Yet these islands of technological dominance exist in a sea of macroeconomic imbalances and troubles, which can only really be addressed by more liberal and open economic reforms.”
Bottom line, Magnus adds, “the current focus on economic policy is important not for some decimal points on GDP but as a signal as to whether the government can, or wants to, grasp the nettle.”
Magnus is hardly alone in worrying that policy tinkering won’t be enough. Only bold and disruptive moves to reform the state sector, develop deeper capital markets and encourage households to save less and spend more will make China a more long-term competitive and dynamic economy.
Half measures, on the other hand, will likely mean that China remains susceptible to boom/bust cycles perpetrated by the misallocation of capital, weak debt capacity and mismatches between household income and spending.
The upcoming NPC will be an ideal moment to reassure investors that big-picture reforms are in the works. For now, though, an increasing number of investors are already getting the memo on China’s grand plan.
Follow William Pesek on X at @WilliamPesek
