[Global Focus] Is China Under Xi Jinping Making a U-Turn on Money Printing?

It has already been over a month since China, which promised 5% growth, began rolling out a full-scale economic stimulus package. Not only did it lower interest rates and ease housing purchase regulations, but it also announced plans to release subsidies and expand large-scale fiscal spending. However, questions still linger in the market. Has Chinese President Xi Jinping, who had long been negative about short-term economic stimulus, truly shifted his policy stance? What caused his sudden change of mind? Will this stimulus package be sufficient to get the Chinese economy back on track? The Chinese stock market, which had been suppressed for a long time, briefly responded but then faltered again. This is why attention is focused on the specific scale of fiscal support to be announced soon.

[Image source=Yonhap News]

China Unleashes Stimulus Measures Over the Past Month

Since the end of last month, about a week before the National Day holiday (October 1?7), the Chinese government has been announcing a series of stimulus measures centered on liquidity supply, interest rate cuts, and funds to stabilize the stock market. The joint monetary easing, real estate market support, and stock market stimulus measures released on September 24 by the three major financial authorities?the People's Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission?surprised the market. It was unprecedented that the People's Bank explicitly mentioned stock market support and that the three financial authorities mobilized comprehensive policy tools. More importantly, it signaled a shift in stance by President Xi, who had consistently expressed a negative view of stimulus measures as mere 'waste.'

Just two days later, President Xi unexpectedly chaired a meeting of the Central Political Bureau. His call to revive the real estate, consumption, and capital markets was interpreted as a message that he was determined to prioritize economic growth, and the long-declining market immediately cheered. On September 30, the day before the National Day holiday began, the Shanghai Composite Index recorded its largest single-day gain since the 2007 global financial crisis. More than 200 million retail investors (known as "chunshu," the Chinese equivalent of retail investors) flocked to the stock market, causing disruptions in the housing transaction system on September 27.

The Hong Kong South China Morning Post (SCMP) noted that this signaled the need for a large-scale stimulus package similar to the 4 trillion yuan stimulus implemented in 2008 to counter the global financial crisis, highlighting that the CSI 300 Index and Shanghai Composite Index rose by double digits over the past month. The Wall Street Journal (WSJ) described the People's Bank's unprecedented move to encourage stock purchases and reported that, as with the sudden lifting of COVID-19 lockdowns that previously hit the Chinese economy, the policy shift was abrupt.

The stimulus measures revealed over the past month have focused on liquidity supply and stock market support. Specifically, the Chinese authorities' 0.5 percentage point cut in the reserve requirement ratio (RRR) is estimated to inject about 1 trillion yuan (approximately 190 trillion won) in liquidity into the market. Additionally, policy rates for 7-day and 14-day reverse repurchase agreements (reverse repos) and the Medium-term Lending Facility (MLF) rates were lowered. A 500 billion yuan swap program between the People's Bank and institutional investors supports listed companies' share buybacks and equity expansion. The plan is to stimulate domestic demand and prop up the stock market by supplying liquidity. Alongside this, the Chinese government announced plans to provide trillion-yuan scale funding to so-called 'white list' projects in the sluggish real estate market.

Did Xi Jinping Become Conscious of Responsibility Amid the 5% Red Flag?

Major foreign media outlets have described the Chinese government's stimulus package announcements as "finally" happening. Despite expert consensus that bold stimulus measures were necessary for China to regain its status as a 'global growth engine,' President Xi had previously expressed a negative stance toward short-term stimulus. The Economist explained, "The Chinese government has feared excessive support more than insufficient aid to the economy," adding, "Xi Jinping believed that direct support to households would undermine self-reliance and not help economic growth."

However, with a red flag raised on achieving the 5% annual economic growth target amid intensifying all-around pressures such as government debt, population decline, rising youth unemployment, and trade conflicts with the United States, it is analyzed that President Xi, who had previously shown relaxed confidence in official settings, could not help but become conscious of his responsibility for economic management. According to the National Bureau of Statistics of China, the country's economic growth rate in the third quarter was only 4.6%. The cumulative growth rate from the first to the third quarter also remained at 4.8%, fueling speculation that the 5% target will be difficult to achieve. China's youth unemployment rate is approaching 19%, and deflation has persisted for two consecutive years.

Some compare this to the deflationary spiral Japan experienced after its real estate bubble burst in the 1990s.

Andy Rothman, investment strategist at Matthews Asia Fund, analyzed the background of the stimulus package announcement by saying, "Xi Jinping has now recognized that the Chinese economy is on the wrong path" and "he realizes that a practical course correction is urgently needed." Mitrade stated, "The Chinese leadership could no longer ignore the real estate slump and rising debt," adding, "Xi Jinping's sudden U-turn shows that he is now focused on saving the world's second-largest economy." Moody's raised its growth forecast for China this year from 4.8% to 4.95% after the stimulus announcement, calling it a "welcome development."

Attention on Fiscal Stimulus Scale... Some Point Out It Won't Be a Game Changer

The key issue is the scale of the fiscal stimulus to be announced in the future. The Chinese government has stated that it will finalize and announce the scale of fiscal support, including the issuance of special government bonds, after completing legal procedures. Since simply lowering interest rates and supplying liquidity will not immediately revive the economy, direct fiscal spending will be expanded. Specific details are expected to be finalized at the Standing Committee meeting of the National People's Congress (NPC) scheduled for the end of this month. However, given that the U.S. presidential election, which will inevitably affect China's overall policy stance, is scheduled for November 5, there is a possibility that the announcement could be delayed until after that date. It is speculated that China may wait to see who becomes the U.S. president before taking further action.

Locally, there is analysis that funds exceeding those of the large-scale 2008 stimulus package, implemented to prevent recession caused by the U.S.-originated global financial crisis, will be required. That stimulus package was worth 4 trillion yuan. Zhang Bin, deputy director of the Institute of World Economics and Politics under the Chinese Academy of Social Sciences and an advisor to the Chinese government, argued in a recent webinar that a 12 trillion yuan stimulus package will be necessary next year through the issuance of national bonds, local special-purpose bonds, and off-budget bond sales. Considering China's 5% economic growth target for next year, such a scale of debt issuance is deemed inevitable. SCMP noted, "Speculation games about the final stimulus scale continue," and said, "The NPC meeting will be the climax of policy changes."

While expectations are mounting that the fiscal stimulus scale will reach trillions of yuan, some analysts suggest that the Chinese government may not present any concrete figures at all. Larry Hu, chief China economist at Macquarie Capital, wrote in an investor memo, "They don't need to provide numbers," explaining, "In China, the boundaries between fiscal, monetary, and industrial policies are often blurred, making it difficult to present specific figures."

Experts emphasize that more important than the size of the fiscal stimulus is whether President Xi's policy stance, which had been reluctant to implement short-term stimulus, has truly changed and whether this announcement will lead to a restoration of private sector confidence. Haibin Zhu, chief China economist at JP Morgan, said, "We can see a policy shift, but it is not a 180-degree turnaround," adding, "If asked whether this will be a game changer or whether China has reached the stage of 'doing whatever it takes' to recover the economy, my answer is 'no.'"

Tao Wang, chief China economist at UBS Investment Bank, argued that the Chinese government's stimulus measures "can inject important confidence into the market and help stabilize the economy," but "really strong momentum is needed in terms of fiscal policy and confidence." Pierre-Olivier Gourinchas, chief economist at the International Monetary Fund (IMF), also pointed out that while waiting for China's detailed stimulus measures, household and corporate confidence is declining, warning, "Although the direction is correct, it is not sufficient to drive substantial growth."