This is an interesting take but it misses the mark.
China DOES NOT need a $1-2 trillion fiscal stimulus to save its economy.
Yes, most of Chinese household wealth is in real estate. And for the longest time, this contributed the most to rising wealth beyond doing business.
I also agree that fiscal stimulus is the best thing Beijing can do right now for its economy.
But here’s what happened in the past 5-7 years. (Sorry for the long thread)
1. The US launched a trade war and economic war against China. This forced traditional manufacturing to move out of China to avoid tariffs, leading to loss of jobs but also loss of business. A slowdown in wealth creation.
2. Beijing regulated tech firms and shook the industry responsible for an increasing share of the nation’s new wealth and employment. It was determined to create an even playing field that made it more difficult for big companies to dominate using Western tactics of anti-competitive behavior and growth at all cost.
3. COVID hit and the ensuing lockdowns decimated small business. While China avoided the zero rates and stimulus checks approach, ordinary citizens tapped into their savings to get by. Local govt revenues dried up with the lack of activity.
4. Post COVID surge in activity led to a worrisome bubble in real estate. Developers leveraged to their eyeballs and building projects left and right. A crackdown on excessive debt among developers led to a housing crisis and total loss of confidence among property buyers. Prices have been declining ever since.
5. Chinese equities have been trapped in a vicious boom-bust cycle. Investors treat it like a casino. Regulators are slowly trying to open up the market but have been unable to meaningfully contribute to investor wealth creation. Market cap to GDP of 60% says it all.
Meanwhile, Chinese households have accumulated $20T in savings stuck in mostly low-yield bonds and time deposits. This is the biggest source of stimulus if mobilized effectively.
It will take a while for confidence to be fully restored in real estate. We have some green-shoots of recovery over the holidays but this doesn’t mean good times are back. And Chinese buyers are smarter than that.
Beijing needs to get another leg of its economy in good shape. Shifting their focus to the stock market has its merits because it can help create wealth quickly and visibly. But if not handled with care (and allowed to froth and bubble) could destroy wealth just as fast like it has done so several times before.
This is why I think their recent moves and announcements that appear tailored to get the market going but not allow it to froth is VERY TELLING of their approach and goal.
If they can raise the market cap to GDP to equal just that of India, it will create $7trn in new wealth. If they raise it to the level of the US, it creates $18trn in new wealth equal to the size of their economy.
This wont happen overnight of course. The faster they try to get there the less likely it will happen and end up in an epic crash. To avoid this, Beijing needs to be more thoughtful of market conditions and investor confidence. They are starting to behave this way. Whether the government remains this way is another question.
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Money Thrill : Thank you for article. Very good professional analysis of market conditions. I see no other option than to congratulate you for this. May more of that. I am a retired Investment Advisor from Belgium
大猫咪 : Great read