Chinese stocks rose on Wednesday after China's top parliamentary body approved a 1 trillion yuan ($137 billion) sovereign bond issuance to support the economy. The bond issuance is part of a stimulus package aimed at benefiting industries where Beijing wants to replace old economic drivers. However, concerns remain over the impact of the bond issuance on economic growth. UBS economist Paul Donovan suggests that the rush to stimulate the economy may indicate concerns about growth momentum in 2024 or a worry that living standards are not as good as reported GDP figures imply. This comes as China's GDP growth target for the year is almost guaranteed at 5%. The issuance of additional sovereign debt will increase China's budget deficit in 2023 to around 3.8% of GDP, compared to the previously set 3%. This is the first time since 2000 that China has increased its budget deficit during the fiscal year and the fourth time in history that the country has issued special sovereign debt. The most recent issuance was to combat the impact of Covid-19. Chinese automotive and infrastructure stocks stood out, rising 2.9% and 2.4% respectively.
China's newly appointed finance minister, Lan Foan, announced that the government will increase government spending in 2024 to stimulate domestic demand and support the economy. The government plans to utilize a combination of policy tools, including special bonds, national bonds, tax incentives, and fiscal subsidies, to moderately expand the scale of fiscal spending. This move comes as Beijing aims to strengthen the overall coordination of fiscal resources. Lan Foan's statement was published in an interview with official newspaper People's Daily. The article is available only to subscribers.
Beijing is closely watching the Federal Reserve's moves as they may hold the key to a successful recovery in China's economy. China's efforts to boost its economy have been met with disappointment, with initiatives being cautious and vague. The country has limited room to maneuver without a decisive shift by the Fed, as officials fear weakness in their currency. The People's Bank of China can make small cuts in borrowing costs, but the effect is likely to be muted. Punitive measures, such as tightening trading restrictions, will only sap confidence. If the US Federal Reserve cuts interest rates or convinces people it will do so soon, China will have more scope to be aggressive in its monetary policy. The two largest economies, China and the US, are intertwined, and if the upcoming stimulus works, it will be seen as 'Made in the USA'.
China's economic slowdown may provide justification for Federal Reserve Chairman Jerome Powell to implement rate cuts. The article discusses how China's economic struggles, including a decline in manufacturing and exports, could have a ripple effect on the global economy. The author suggests that Powell may use this as an opportunity to lower interest rates in order to stimulate the U.S. economy and mitigate the impact of China's slowdown. The ongoing trade tensions between the U.S. and China are also mentioned as contributing to the economic challenges faced by both countries. The article explores the potential implications of China's economic pain on the Federal Reserve's monetary policy decisions.
Nobel laureate in economics Paul Krugman criticizes China's lack of government spending to support consumer demand, stating that it is a threat to the global economy. He argues that China cannot rely solely on exports and should focus on supporting domestic demand. Another economist, Stephen Roach, also notes a grim mood in Beijing and a lack of economic spark. Li Daokui, a policy adviser to the Chinese government, predicts more supportive policies for the economy in the coming months. Krugman also questions Japan's concern over a weaker yen, stating that it can actually boost demand for Japanese goods and services. He suggests that Japan should not panic over the falling yen. Japan's economy has contracted, and the yen weakening is driven by a wide interest rate gap with the Federal Reserve. Krugman recommends cutting rates to signal attentiveness to inflation and economic conditions.
China implemented a cash-for-clunkers program to boost its economy, similar to the one implemented in the US during the 2008-09 financial crisis. However, the results have been disappointing. Only 113,000 cars qualified for trade-in subsidies, and buyers of new appliances are offered small discounts. The incentives are not enough to bring customers into stores. The current strategy has been hindered by tight eligibility restrictions and limited financing. The central government pays 60% of the cost of car subsidies, but provincial and local governments are reluctant to offer more generous subsidies due to heavy debts. The weak consumer spending in China has led factories to chase more customers overseas, resulting in backlash and trade restrictions [a2851e61].