Xi Has Finally Realized What’s Ailing China
The latest stimulus package signals a technocratic shift within the government.
Storm clouds are gathering over China’s economy.
Photographer: Cheng Xin/Getty Images
Once bitten, twice shy. The supercharged stimulus measures China’s top leaders announced in recent days has left many investors unconvinced. After all, Beijing has been vowing to revive growth with rate cuts and special lending programs for months — to little avail. The property market is cooler than ever, producers’ deflation is entering a third year, and youth unemployment hit a record high again.
Investors have been asking me how this round of stimulus is different: Is it the whatever-it-takes moment for China? Has the economy gotten so bad that it finally hit Beijing’s pain point? Now that FOMO, or fear of missing out, is kicking in, global asset managers are once again debating whether the government has the will, the competency, or the fiscal space to restore economic confidence.
I am not one to say where President Xi Jinping’s pain point is — anyone who claims to know is bluffing — but looking at the latest policy announcements, it’s clear that top leaders have finally realized what is really ailing China, and why past measures have not worked.
Three details jump out. First, the fiscal power. For the first time since 2018, the Politburo, headed by Xi, discussed economic matters in September, topics usually reserved for the April, July and December meetings. Boosting fiscal spending took front seat in the readout.
China is experiencing what Nomura Securities’ economist Lu Ting calls a “second wave of shocks.” In the past, local governments played a helping hand by promoting regional growth and luring businesses to relocate to their jurisdictions. But with the property downturn and dwindling revenue from land sales, they have become an impediment to society. They’ve been imposing exorbitant fines on things like traffic violations in order to make their own ends meet.
In the first eight months of the year, non-tax revenue grew by 11.7%, while land sales tumbled by 25.4%. How can people have any confidence in the government if their first point of contact — often low-level civil servants — are arbitrary and unreasonable in their fee collections?
Desperate Housekeepers
Local officials are imposing exorbitant fines to make up for lost land sales
Source: Bloomberg
In deep economic slowdowns, a government needs to fire on both fiscal and monetary cylinders. While the People's Bank of China has been cutting interest rates, the rest of the bureaucracy has been sitting idle — or even worse, annoying citizens and companies. The 2024 budget called for the government fund account, which includes spending on infrastructure projects, to hit a 4.9 trillion yuan deficit. As of August, the deficit was only 2.1 trillion yuan.
Short Fuse
This year's fiscal deficit falls short
Source: Bloomberg
The latest Politburo readout emphasized fiscal spending and borrowing, including the issuance and deployment of ultra-long sovereign as well as special-purpose municipal bonds. It’s a sign that Xi is now aware why PBOC’s monetary easing has not worked.
Second, youth unemployment is perhaps as big a headache to the government as the property slump. China’s universities churn out more than 10 million graduates each year. The jobless rate for urban youth aged between 18 and 24 hit 18.8% in August even after the statistical bureau changed its data methodology in January, prettying up the numbers by excluding students from the labor pool.
White-Collar Recession
Graduation class of 2024 is also facing a difficult job market
Source: Bloomberg
Note: China changed how it calculates youth unemployment in January, excluding students from its labor pool
There’s a detectable shift in official rhetoric. Last May, Xi told young people to “eat bitterness” and embrace difficulties as he did in the 1960s, only to be mocked online. He changed his tone this year, calling for quality jobs instead. Last week, the government said it would provide some social security benefits to those who haven’t found a job two years after leaving universities.
It’s a tacit acknowledgment of the structural labor market issues Gen Z are facing. In its bid to shift to new growth engines such as EV manufacturing, the government’s regulatory crackdowns on real estate and financial services have reduced employment options for many. There are plenty of blue-collar jobs out there, but do the educated urban youth want to go back to the assembly lines or be food delivery riders for Meituan, even if these gigs pay better? Providing “quality” jobs has become a new official slogan, which is a good start.
Third, the property market. In May, China unveiled a broad-based rescue package, including lowering mortgage rates and converting some unsold homes into public housing. As part of that plan, the PBOC opened a 300 billion yuan re-lending facility so that state-owned entities can buy apartments from distressed developers, who in turn might get some cash to complete and deliver pre-sold flats to homebuyers. There has been little drawdown since. As a result, the central bank will ramp up its re-lending program, providing 100% of the principal, up from 60% previously. This is perhaps China embracing the essence of its traditional medicine: Tweak and double down the dosage if previous remedies fail to yield results.
No doubt, being bearish about China is one of the most popular trades, and asset managers have been fretting that Beijing’s easing measures don’t work as well as before. However, this round of policy announcements is a bit different, in that the new slogans sound more informed and in sync with sentiments on the ground. The table is perhaps turning for technocrats.
More From Bloomberg Opinion:
- Chinese Takeout in Saudi Arabia? You Bet: Shuli Ren
- China’s Credit Bazooka Isn’t What It Used to Be: John Authers
- China Adds a Touch of Showbiz to Its Stimulus: Daniel Moss
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