The calls for Chinese stimulus measures are becoming louder, both at home and abroad

BEIJING – More and more economists are calling on China to stimulate growth, including that in the country itself.

China should issue at least 10 trillion yuan ($1.42 trillion) in ultra-long government bonds over the next two years for human capital investment, said Liu Shijin, former deputy head of the Development Research Center at the State Council, China’s top executive. body.

This is evident from a CNBC translation of Liu’s comments in Mandarin, available on financial data platform Wind Information.

His presentation Saturday at Renmin University’s China Macroeconomics Forum was titled: “A basket of stimulus and reform, an economic revitalization plan to substantially expand domestic demand.”

Liu said China must make greater efforts to address the challenges faced by migrant workers in cities. He stressed that Beijing should not pursue the same kind of stimulus as advanced economies, such as simply cutting interest rates, because China has not yet reached that level of slowdown.

After a disappointing recovery last year from the Covid-19 pandemic, the world’s second-largest economy remains under pressure from a real estate slump and tepid consumer confidence. Official data from the past two months also points to slower output growth. Exports were the rare bright spot.

Goldman Sachs joined other institutions earlier this month in lowering its annual growth forecast for China, from 4.9% previously estimated to 4.7%. The cut reflects recent earnings releases and the delayed impact of fiscal policy versus the company’s previous expectations, the analysts said in a Sept. 15 note.

“We believe the risk that China will miss its full-year GDP growth target of ‘around 5%’ is increasing, and with it the urgency for more demand-side easing measures,” the Goldman analysts said.

China’s much-anticipated Third Plenum Meeting of Top Leaders in July largely reiterated existing policies while saying the country would work toward achieving full-year targets announced in March.

In late July, Beijing announced more targeted plans to boost consumption with trade-in subsidies, including upgrades to major equipment such as elevators.

But several companies said the measures would not yet have a meaningful impact. Retail sales rose 2.1% in August from a year ago, one of the slowest growth rates since the pandemic recovery.

China has also introduced several incremental measures over the past two years to support real estate, which once accounted for more than a quarter of the Chinese economy. But the real estate crisis continues and related investments have fallen by more than 10% in the first eight months of the year.

“The elephant in the room is the real estate market,” said Xu Gao, Beijing-based chief economist at Bank of China International. He spoke last week at an event organized by the Center for China and Globalization, a think tank based in Beijing.

Xu said the demand from Chinese consumers is there, but they do not want to buy properties because of the risk that the houses cannot be delivered.

Apartments in China are typically sold before completion. Nomura estimated at the end of 2023 that approximately 20 million such presold units remained unfinished. Homebuyers in one such project told CNBC earlier this year that they had waited eight years to get their home.

To restore confidence and stabilize the real estate market, Xu said policymakers must rescue real estate owners.

“Current policies to stabilize the real estate market are clearly not enough,” he said, noting that the sector is likely to need support on a scale of 3 trillion yuan, up from roughly 300 billion yuan announced so far.

China’s top leaders have focused more on strengthening the country’s capabilities in advanced manufacturing and technology, especially in light of increasing U.S. restrictions on high-tech.

“While the Politburo meeting in late July signaled an intention to escalate policy stimulus, the degree of escalation was incremental,” Gabriel Wildau, U.S.-based director of consultancy Teneo, said in a note earlier this month.

“Top leaders appear satisfied with achieving the GDP growth target of ‘around 5%’ this year, even if that target is achieved by nominal growth of around 4% combined with deflation of around 1%,” said he.

In a rare high-level public commentary on deflation, former People’s Bank of China Governor Yi Gang said in early September that leaders should “focus on combating deflationary pressures” with “proactive fiscal policy and accommodative monetary policy ”.

However, Wildau said that “Yi has never been in the inner circle of Chinese economic policymakers, and his influence has continued to decline since his retirement last year.”

China’s latest report on retail sales, industrial production and fixed asset investment showed slower-than-expected growth.

“Despite the increase in government bond financing, infrastructure investment growth has slowed significantly as local governments are constrained by tight fiscal conditions,” Nomura’s chief Chinese economist Ting Lu said in a Sept. 14 note.

“We believe the Chinese economy may face a second wave of shocks,” he said. “Under these new shocks, conventional monetary policy is reaching its limits, so fiscal policy and reforms must come to the fore.”

The PBOC left one of its key interest rates unchanged on Friday, despite expectations that the US Federal Reserve’s rate cut earlier this week could support further monetary policy easing in China. Fiscal policy has been more cautious so far.

“We believe Beijing should provide direct financing to stabilize the property market, as the housing crisis is the cause of these shocks,” Nomura’s Lu said. “Beijing also needs to increase the number of transfers [from the central government] to ease the budget burden on local governments before they can find longer-term solutions.”

The Chinese economy still officially grew by 5% in the first half of the year. Exports rose by a more than expected 8.7% in August compared to a year earlier.

In the short term, we really need to focus to be sure [to] Successfully achieving this year’s 2024 growth targets of about 5%,” Zhu Guangyao, former vice minister of finance, said at the Center for China and Globalization event last week. “We remain confident of achieving that goal.”

When asked about China’s financial reforms, he said they focus on the budget, regional budget reforms and the relationship between central and local governments. Zhu noted that some government revenues were lower than expected.

But he highlighted how China’s Third Plenum focused on longer-term goals, which he said could be achieved with GDP growth of between 4% and 5% per year over the next decade.