Pan Gongsheng to the rescue?

China’s central bank governor Pan Gongsheng took a sip of tea then sent global markets buzzing yesterday (Tuesday) as he announced the most aggressive stimulus package since the pandemic, for the world’s second-largest economy.

While the timing and specifics contained surprises, it’s all part of something we’ve long been tracking: China’s attempts to grapple with a deflating property bubble, weak consumer demand, wage stagnation, and beyond.

So, Governor Pan’s new plan includes 1) a 0.5% interest rate cut, 2) incentives for homebuyers, 3) an easing of bank reserve ratios to free up a trillion yuan ($142 billion) in extra lending, and 4) the first inklings of a stock stabilisation fund.

Pan will have been happy with what happened next:

• China’s stocks enjoyed their biggest rally since 2020
• Stocks across broader Asia hit new 2.5-year highs, and
• Even US and European futures in China-linked industries got a bump, from automobiles to luxury goods.

The cherry on top? Pan also hinted there could be more of that sweet sweet stimulus to come, depending on how things play out next.

But the Harvard and Cambridge-educated Pan may have felt a little deflated by what then happened: folks started asking the same question they asked last time, and the time before that: is this enough? For many China-watchers, Pan has now given China’s economy some extra breathing room, but its deep-rooted challenges persist.

Of course, China’s economy has major strengths, from high tech to low costs, and more renewable energy installed last year than the rest of the world combined. But when it comes to challenges? Ufff, take your pick: whether it’s China’s shrinking and ageing demographics, its huge and shadowy debt pile (often with local governments), the growing list of countries blocking its low-cost exports, and beyond.

And it’s worth a quick look at just one of the challenges: China’s property sector.

It toppled into crisis back in 2021, after Beijing tried to rein in developers that had taken on way too much debt – by the time a Hong Kong court ordered the liquidation of the infamous Evergrande this year, it was the world’s most indebted developer, owing $300B.

As a result, sure, China doesn’t have the kind of housing affordability crisis afflicting parts of the West. But China’s estimated ~80 million vacant homes are a tangible sign of something else: as more developers teeter, they risk taking households with them. That’s because China’s households store ~70% of their wealth in real estate.  

So in this context, and with other dashboard lights like youth unemployment flashing red, you can see why observers might still ask if Pan’s measures are enough:

• Yep, home-owners will welcome the mortgage relief, but they’ll also be more likely to just pay down their loan rather than spend or invest, and
• Yep, freeing up $142B for new lending sounds good, but it doesn’t address the reasons why folks and firms are still reluctant to borrow in the first place.

So all the attention is still on President Xi Jinping and his politburo, who are expected to convene just before China enters a weeklong holiday (National Day) in early October.

And yet Xi has long resisted the growing calls to firehose more cash at the economy and jolt it back to life, arguing that too much stimulus can breed idleness.

So the world will be watching for any signs that Xi might now have changed his tune.

INTRIGUE’S TAKE

But what do other folks in China think? This Chinese-language article was doing the rounds last month before Beijing censored the original, and it’s easy to see why:

• The author (a professor) describes “an environment of financial repression” and warns that if everyone is still “confused, anxious and worried, then monetary easing is useless”
• He describes a “self-protection mentality”, with officials focused less on solving problems and more on “how to minimise the risk of being held accountable”
• As a result, he describes China’s mounting problems as being like Sisyphean stones: “prevention and control are becoming more and more difficult… and the actual price paid is getting higher and higher”
• In turn, he argues that “short-term risk elimination leads to long-term risk accumulation”, and in the end, he says
• “No matter which market, it will enter a state of shrinking until… a black swan breaks out”.

Now to be clear, this is just a single article. But it’s still circulating widely. And in a political context where high-profile economists are vanishing for dropping critical remarks in a private group chat, there aren’t enough fire emojis to describe an article like this one. And that might offer a sense of why China-watchers, including members of Team Intrigue, still have real doubts whether Governor Pan’s measures are enough.

Also worth noting:

• By way of possible counterpoint to the gloomy picture above, we’re also getting word on the ground that this could be a good time for entrepreneurs to start a business in China, as anxious local governments (including in megacities like Shanghai) are now offering some remarkable incentives.