The start of the year saw Chinese stocks tumbling to
five-year lows on growth concerns and deflation deepening to levels unseen
since the global financial crisis, prompting comparisons with the 2015 turmoil
that forced policymakers into action.
"The last time the Chinese leadership faced this kind
of pressure was in 2015," said Tommy Wu, a senior China economist at
Commerzbank, who added, "2024 is a crucial year for China to stabilize the
economy.
"However, the current situation is a lot more
complicated."
China overcame the 2015 crisis by devaluing the yuan and
tightening its capital account to prevent outflows, while pouring resources
into property and infrastructure, and slashing interest rates by more than 100
basis points.
But that policy ammunition is now spent, bent or broken,
limiting its options to fix a stuttering economy and find a way out of what
threatens to become a self-feeding downward spiral in consumer and investor
confidence and economic growth.
The property market has been in free fall since 2021 because
of a series of defaults among developers after years of overleveraged, bad
investments. Infrastructure spending is difficult to sustain because of high
levels of local government debt.
Further monetary policy easing risks a run on yuan assets
due to a yawning interest rate gap with other economies and could exacerbate
deflationary pressures as cheap credit flows into China's industrial complex,
ridden with overcapacity.
As China's rubber stamp parliament, the National People's
Congress (NPC), begins its annual meeting on March 5, there has been no
indication of major stimulus or a grand reform plan in the making.
"It is widely underappreciated how constrained Beijing
is at this point, in terms of options to stimulate the economy via fiscal
policy, or through more rapid credit growth from banks," said Logan
Wright, a partner at Rhodium Group.
"There will be no policy bazookas unveiled at the NPC,
in part because China has no good options to maintain growth via its
traditional channels."
'STUCK BY CHOICE'
Fleeing investors have expressed frustration that
authorities have not unveiled a clear roadmap to fixing structural issues laid
bare last year when the Chinese economy failed to replicate the explosive
recovery experienced by other economies after COVID-19.
Markets want clear, long-term plans for cleaning up the
property sector, restructuring municipal debt, and switching to a more
sustainable growth model that relies less on debt-fuelled investment excesses
and more on household consumption.
The NPC is not the traditional venue for Chinese leaders to
declare momentous policy shifts, which are usually reserved for events known as
plenums, held by the ruling Communist Party between its once-every-five-year
congresses.
One such plenum was initially expected in the final months
of 2023, and while the meeting could still take place in the near future, the
fact that it has not yet been scheduled has deepened investor concerns over
policy inaction.
At the NPC, Premier Li Qiang is expected to deliver his
annual work report and set the year's economic targets, including steady growth
for 2024 at around 5%, and a budget deficit of 3% of gross domestic product.
But setting a target similar to last year's without new
policies to redirect resources from infrastructure and manufacturing investment
to households runs the risk of hurting confidence, rather than boosting it,
analysts say.
Fathom Consulting estimates that every additional 10 yuan
invested in the Chinese economy today generates 0.2 yuan in output, down from
2.1 yuan in 2002.
On the demand front, consumer confidence languishes at
record lows more than a year after China ended its COVID lockdowns.
"There is a lack of investor confidence and business
confidence. But the root cause of this is consumer confidence," said Joe
Peissel, an economic analyst at Trivium China.
"The most effective way to deal with this is through
reforms that put more cash in consumers' pockets.
"However, (President) Xi Jinping has previously aired
an antipathy toward cash transfers or generous social security provision, so
this is unlikely."
The rebalancing policies economists and investors are
calling for now are steps Xi flagged as early as 2013, but which China never
took, resulting in debt levels growing much faster than the economy.
Some analysts say policymakers appear to have prioritised
social stability and national security over growth sustainability, due to
concerns over the disruption engendered by a different development model.
That would come about as such measures empower consumers and
private businesses at the expense of the government sector.
"A big shift now would acknowledge serious long-term
mistakes - that's unlikely," said Derek Scissors,a specialist in China's
economy at the American Enterprise Institute.
"China is stuck, by its own choice." -Reuters
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