It's a foregone conclusion that China will stand out as the world's lone economic powerhouse in stimulus mode this year, but just how much stimulus to expect is a point of contention.
The steps Beijing has taken since its early 2022 pivot to a more supportive economic policy stance — most recently a series of lending rate cuts over the past week or so — have left analysts feeling underwhelmed.
Markets are eagerly awaiting new stimulus measures from Chinese policymakers to further support an economy "ravaged" by recent COVID-19 lockdowns, but steps taken thus far suggest more of a "muddle through" mindset than a sense of urgency, Seema Shah, London-based managing director and chief strategist at Principal Global Investors, said in an Aug. 19 post.
While China's policymakers were quite active during the second quarter, refilling government buffers to fund infrastructure investments and tax cuts, those moves appear "inadequate" in light of weak GDP growth, high unemployment and disappointing retail sales and industrial product in July, Ms. Shah said.
"Quicker and larger amounts of government spending are needed" to reverse the drag on China's economy this year from COVID and the country's property market downturn," agreed Aninda Mitra, Singapore-based head of Asia macro and investment strategy with BNY Mellon Investment Management.
To some extent, such tepid appraisals reflect unavoidable comparisons with Beijing's aggressive response to prior periods of economic stress, most prominently the global financial crisis of 2008 and 2009.
In the wake of the GFC, China introduced "the largest stimulus package in the world," at 4 trillion yuan (roughly $585 billion at today's exchange rates), about three times the scale of the U.S. response, Oxford University professor Christine Wong noted in a 2011 review in the OECD Journal on Budgeting.
The flood of spending Beijing unleashed from late 2008 allowed China's economy to avoid a sharp deceleration. GDP growth, which slowed to 9% in 2008 from 11.7% the year before, steadied in 2009 at 8.7% before rebounding to 10.4% in 2010. But that growth came with considerable side effects, including a doubling of real estate prices in major cities and a worrisome surge in local government debt, Ms. Wong wrote.
This time around, amid new challenges for Chinese policymakers this year, such as a mortgage payments boycott by hundreds of thousands of would-be buyers of stalled property development projects, "only Herculean actions from policymakers, which (bring) back confidence," can head off heightened systemic risk and downward pressure on Chinese growth, Alicia Garcia Herrero, chief economist, Asia-Pacific, with Natixis Corporate & Investment Banking, wrote in an Aug. 3 research note.
Many analysts say they have yet to see any signs that the cavalry will be riding to the rescue.
China looks to have "permanently turned away from its former debt-fueled growth model," declining to resort to wasteful investment to fuel short-term growth this time around, said Preston Caldwell, Chicago-based head of U.S. economics and chairman of the China Economics Committee at Morningstar Inc.
But that commitment to financial prudence will be severely tested in the face of China's economic slowdown, Mr. Caldwell predicted.
Michael Edwards, deputy chief investment officer with Weiss Multi-Strategy Advisers LLC, a New York-based hedge fund manager with $4.2 billion in assets under management, said there's ample reason to believe Beijing could fail that test.
With a mere three months to go to what could be the "most important political moment in China" in decades — the National People's Congress where President Xi Jinping is expected to claim a third five-year term — the pressure on policymakers to ensure the latter half of 2022 is dramatically better than the first half will be overwhelming, Mr. Edwards said.
From a policymaking standpoint, that could mean "going back to the easy, well-oiled levers that can be pulled by Beijing": big construction and infrastructure projects, coal mine and coal plant approvals, boosting steel output — effectively throwing money at the problem because there's no other way to achieve the quick revival of animal spirits required, he said.
Whether Chinese policymakers go big or remain restrained, however, analysts predict investors will see Chinese equities as a relatively attractive value proposition over the remainder of the year, after being out of favor for the first half.
"Investors may be disappointed that a 'bazooka' type of stimulus, of a level comparable to previous cycles, is not forthcoming" but policy will still be "tilted to the dovish side" in contrast to most of its global peers, Principal's Ms. Shah said.
