China's 30% Stock Rise Poses Economic Problem

The bulls running through Shanghai are starting to look over their shoulders.

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Winning over them is an economic reality that leads many to wonder if the over 30% soaring shares compared to the September low is exaggerated. The problem is an underlying economy facing intensifying headwinds. And one of them failed to keep pace with the sudden rise in investor optimism towards China.

This stock market rally follows a series of extraordinary measures aimed at cutting interest rates, lowering mortgage rates, easing rules for home buyers in big cities and reducing the amount of cash banks owe. keep in reserve.

Chinese leader Xi Jinping hints at bigger steps ahead to boost national growth.

These maneuvers changed the subject of the real estate crisis generating deflation in China, high youth unemployment and weak consumer demand.

Not for long, though, as Chinese data suggests more trouble lies ahead. In August, industrial industry profits plunged 17.8% from a year earlier, the sharpest contraction so far in 2024. More data on retail sales and investment in fixed assets add to concerns about a further slowdown in Asia's largest economy.

So much so that some economists believe Xi's Communist Party should issue around 10 trillion yuan ($1.4 trillion) in special debt to boost confidence via infrastructure projects. Among them is Count Jia Kang, director of the private think tank China Academy of New Supply-Side Economics.

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As these projects take off, they will create jobs, increase citizens' incomes and unlock consumption potential, Jia, a former director of a research institute linked to the Ministry of Finance, told a Chinese publication. The paper.

In other words, what the Xi team has done so far has not achieved the impact economists hoped for. One problem is that China is doing more to pump money against the forces driving deflation than to implement policies to reverse them.

Hence the fear that the surge in stocks does not anticipate concrete efforts to increase China's economic game. Or even credibly achieve this year's 5% growth target.

This reminds us that China must address the underlying causes of its economic crisis, not just its symptoms. These are the causes that caused Chinese stocks to fall two weeks ago. The selloff reflects fears that the economy is stumbling.

Yet even if the bulls charge again, these concerns remain real.

In an opinion piece for the Project Syndicate news agency, Chinese economist Yu Yongding argues that it is fair to say that China's economic miracle of maintaining an average annual growth rate of 10 percent is over. Nevertheless, I believe that with sound macroeconomic policy, market-oriented reforms and a real commitment to opening the economy, the economy should be able to maintain a solid growth rate of 5 to 6% for the foreseeable future.

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Yu was on the monetary committee of Chinese central banks. Today, he is on the front lines of another historic debate.

Chinese economists have debated for years whether policymakers should adopt more expansionary fiscal and monetary policies to boost GDP growth, or instead focus on structural reforms aimed at eliminating overcapacity, Yu says. But given this year's lackluster economic performance, their views are increasingly converging. In fact, one could even say that all Chinese economists now advocate expansionary measures.

But it is even more important to take steps to end the housing crisis once and for all. Lessons from Japan abound. In the 1990s, Tokyo moved glacially to remove bad loans from banks' balance sheets, paving the way for 25 years of deflation.

Comparisons between Japan and China have their limits. But the slow stabilization of a real estate sector critical to gross domestic product hasn't helped anyone in China. This is the main cause of Chinese deflation.

Xi's inner circle has been slow to remove questionable assets from real estate developers' balance sheets. There was no urgency to respond to China's rapidly aging population and catalyze a larger, more disruptive startup boom. It has been too slow to build social safety nets to encourage households to save less and spend more.

Harry Murphy Cruise, an economist at Moodys Analytics, can't help but think back to a mini-stock market crash nine years ago. Recent data suggests that Chinese officials are failing to remember the lessons of Tokyo's lost decade.

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Outside of the pandemic, that's the lowest level since the 2015 stock market crash, Cruise says. As the national economy struggles, fears of deflation are heightened.

The 2015 crash still traumatizes Xi's party. In three weeks, from July to August 2015, Chinese stocks plunged 30%. At the time, China Inc. was circling the wagons. Xi's party injected tidal waves of public funds into the markets, canceled all IPOs, suspended trading in thousands of companies, and let mainlanders pledge their homes as collateral to buy stocks.

Yet, then as now, Beijing did more to address the symptoms than the underlying causes. The more the bulls seize it, the more Chinese stocks could be vulnerable to a significant correction.