BEIJING (BLOOMBERG) – China’s authorities are proving surprisingly reserved when it comes to unleashing support measures for its ailing economy, and investors aren’t liking the reticence.
The country’s financial markets are starting to lag global peers, after initially outperforming on optimism officials would take more muscular stimulus. The yuan has fallen for seven days versus a basket of 24 trading partner currencies, while the CSI 300 Index of shares trailed MSCI’s global benchmark by the most since 2015 last week.
A slew of new policies this week failed to reverse the tide. Stocks and bonds fell on Monday (March 30) after the central bank cut short-term rates by the most since 2015. The yuan weakened on Wednesday, despite officials calling for further measures including more cash injections and additional bond sales to bolster local governments’ coffers.
Contrast that with discussions in the US for a fourth round of economic stimulus, as well as the Federal Reserve’s decision to slash rates to zero and pump trillions of dollars into the financial system. European governments have put aside their fiscal-deficit targets to ramp up spending, while Japan’s ruling party this week proposed the country’s biggest-ever stimulus package.
“The policy stance during the virus outbreak has given many investors a reality check,” said Yu Yingbo, fund manager at Shenzhen Qianhai United Fortune Fund Management Co. “For those who are still waiting for Beijing to roll out the big guns – day by day they’ll wait in vain.”
China’s relatively cautious programme of easing speaks to the government’s concerns over price stability and the country’s large pile of debt. That’s even as the economy is forecast to grow at the slowest pace since 1976 this year. The People’s Bank of China said on Monday it still has plenty of room to adjust monetary policy as needed and “doesn’t use its bullets all at once.”
While measures deployed by Beijing underscored its prudent approach to stimulus, investors had expected that stance to shift after top leaders pledged to be more “proactive” in using fiscal policy and exercise “more flexibility” in monetary easing. When economic data showed a worse-than-expected contraction in February, traders snapped up stocks on expectations more support would follow. The CSI 300 rallied 5 per cent that week, the most in a year.
To be sure, efforts elsewhere to support local economies were also initially met with investor skepticism. US stocks tumbled into a bear market last month on concern that emergency measures would fall short. In the UK, where interest rates were cut to a record low, stocks suffered their worst quarter since 1987.
But while markets around the world have stabilized in the past week, China’s stocks and the yuan continue to lose momentum. Average daily turnover in local equities, which hovered around 1 trillion yuan (S$202 billion) for about four weeks, is now half that amount. The CSI 300 rose 1.6 per cent last week, compared with an almost 10 per cent rally in the MSCI All-Country World Index.
Past experience may explain Beijing’s reluctance to wheel out the big guns. In 2008, China cut interest rates, unveiled a 4 trillion yuan spending package and scrapped new loan quotas to counter the effects of global financial crisis. While the measures supercharged the economy, the enduring result was an unsustainable increase in debt.
Further measures are expected this time round, including the first cut to the benchmark deposit rate in five years. Uncertainty remains over the government’s deficit and growth targets, which are typically announced at the National People’s Congress in March. There’s no date for the meeting to convene, with the capital still under a travel lockdown.
“The policies offered right now are just safety-net measures,” said Chen Tonghui, managing director at Shenzhen Valley Asset Management Co. “It seems like this is as much as we can expect in terms of policy support. Flooding the economy with cash won’t address the real problem.”