Beijing Readies Stimulus Package for 2019

Investors skeptical as policymakers must ‘pick their poison’
December 23, 2018 Updated: December 23, 2018

News Analysis

China’s economic stimulus floodgates will open in 2019.

Beijing authorities confirmed on Dec. 21 what economists have long suspected—that monetary and fiscal support measures will begin early next year, as the world’s second-largest economy faces an economic slowdown that shows no signs of abating.

China has dabbled with limited stimulus throughout 2017 and 2018, but recent statements from top policymakers suggest that Beijing will ratchet up the support going forward. The measures include “larger scale of tax and fee cuts,” increased issuance of local government bonds, and further “counter-cyclical adjustments” such as increased government spending, according to statements following the Central Economic Work Conference (EWC) that concluded Dec. 21, as released by state media Xinhua.

This year’s statement from the conference was longer than previous years, emphasizing both the magnitude of challenges and a desire to increase disclosure to shore up the markets.

“These comments echo our view that the current easing cycle will focus on the private sector and fiscal policy,” Morgan Stanley analysts wrote in a note to clients Dec. 21.

The EWC declaration comes two days after China’s central bank—the People’s Bank of China (PBoC)—said that it would supply cheap liquidity to banks for up to three years if banks agree to lend more to small companies. That’s a sign that policymakers are concerned about slowing growth amid recent measures to curb shadow banking.

The PBoC also kept short-term borrowing rates unchanged in a Dec. 20 announcement.

The country faces its most significant economic challenges in years—stalling domestic growth and a trade impasse with the United States, the effects of which are just beginning to manifest in tangible ways.

Easing Property Market Restrictions?

Economists were watching for signs of support for the all-important property market.

But authorities only gave subtle hints of future policy changes. “Property control,” a phrase describing restrictions over Chinese real estate transactions, was noticeably absent from EWC statements for the first time since 2015.

While it wasn’t specifically mentioned in the Dec. 21 announcement, “more flexible property policy could be in the policy toolkit, such as more flexible property financing policies, and city-specific loosening of housing purchase restrictions,” Morgan Stanley analysts said.

It makes sense that any serious stimulus would ultimately involve the property market.

“We expect property investment growth to slow down in the fourth quarter and in the first quarter of next year, which would trigger more policy easing in the property space,” Bank of America-Merrill Lynch’s Greater China chief economist Helen Qiao told the South China Morning Post.

Potential easing measures on the table for 2019 could include loosening credit restrictions, lifting price caps in certain jurisdictions, and relaxing purchase eligibility restrictions such as local residency requirements.

Investors Not Convinced

Onshore stocks dropped Dec. 21 despite reassurances from the EWC. The benchmark Shanghai Composite declined 0.8 percent and the Shenzhen CSI 300 slumped 1.2 percent. The Australian dollar, a proxy for the Chinese economy due to Australia’s outsized export economy, fell 0.96 percent.

Despite its necessity, investors are uneasy regarding further economic stimulus. Beijing has already made several attempts to spur growth this year and help struggling private businesses, with little to show for their efforts.

For instance, the bank reserve requirement ratio has already been cut four times in 2018. Over the past two months, Beijing lowered value-added tax and enacted several deductions for personal income taxes.

The Chinese economy slowed again in November. Official data showed both retail sales and manufacturing production weakening. The outlook remains dim as consumer confidence is lagging and year-to-date stock market performance has been one of the worst among developed markets.

While economists and Beijing policymakers expect more stimulus next year, almost every measure will come with damaging side effects.

Cutting taxes may increase investment growth, but might result in higher budget deficits. Decreasing banks’ reserve requirement ratios might increase lending activity, but would destabilize bank balance sheets and amplify China’s leverage problem. Loosening restrictions on property ownership would undo years of efforts to contain inflated real estate prices. And increasing local bond issuance would spur infrastructure investment but exacerbate debt problems at local governments.

In short, Beijing policymakers will be faced with a game of “pick your poison.”