Ichiro Suzuki
On September 24, the People’s Bank of China (PBOC) announced a policy package to help boost the ailing Chinese economy that has been mired in mild deflation. The package included a 50 bps cut in reserve requirement ratio (RRR), a $113 billion liquidity support for stock purchases, a 50 bps cut to outstanding mortgages, etc. The Chinese stock market jumped for joy to the announcement with a 25% surge through the end of the month, prior to the October holiday week.
The markets’ exhilarating response to the measures was a proof of how depressingly unpopular the Chinese market has been among market participants, both in and outside the country. China was effectively written off among international investors. Then the biggest stimulus measure in years sounded like a bazooka though what was announced had little substance. The PBOC was appointed to singlehandedly carry out the stimulus program, with very little support from the government. Monetary policy alone can’t lift a structurally trapped economy that has been mired in a quagmire of bad debts caused by a spectacular property bust.
Not surprisingly, almost all experts called the stimulus measure insufficient. Even Stephen Roach did. Mr. Roach, senior fellow at Yale University, was formerly the head of Morgan Stanley Asia in Hong Kong, and has been known for his bullish stance on China even after it became evident that China’s growth rate has peaked out. When he shows his displeasure with the stimulus measure, there must be truth to it. As Mr. Roach pointed out, what China needs today is its own version of ‘Abenomics’, the late Shinzo Abe’s economic package to save the Japanese economy out of deflation. Abenomics consisted of three ‘arrows’. They were large scale monetary easing, large scale fiscal stimulus and deregulation. This policy mix has instantly inspired the market participants, and succeeded in lifting the Japanese market out of doldrums for good, and the economy has been following the footsteps of the market, albeit much more slowly. In fact, the third arrow, deregulation, was never shot in earnest. Despite steady progress in deregulation during the eight years of Shinzo Abe at the helm, it fell short of original expectations. With perhaps ‘two and a half arrows’, Abenomics still did the job essentially.
Despite its shortcomings, Abenomics made a lasting impact on the market well beyond a few weeks or a few months, because PM Abe committed himself on fiscal policy in the face of already staggering, and world-infamous, budget deficits. Unlike President Xi Jinping today, PM Abe didn’t hesitate to expand the government’s borrowing. It has been believed that Xi Jinping is scared of boosting spending because its ultimately required size seems so daunting. The worst possible scenario to rescue the Chinese economy includes bailing out the real estate sector, especially through buying out unfinished housing projects from the developers in default, on top of balimg out local governments that are also buried in bad debts. Monetary policy alone can’t get the struggling economy out in the aftermath of a real estate bust. At the time of Abenomics’ start, the Japanese economy was no longer suffering from immediate adverse effects of real estate bust that took place in the 1990s. Bad debts on real estate were cleaned up and bank balance sheets were recapitalized in the first several years of the 21st century, at last. In fact, the Japanese banking system stood firm amid the greatest global banking crisis since the 1930s. The Japanese economy back then was suffering from a sharp demand shock caused by the Great Recession and an excessively overvalued currency. PM Abe still chose to boost the economy on borrowed money. There’s a huge difference between Abe’s boldness and Xi’s timidity. Xi Jinping’s predecessor Hu Jintao wowed the world with a massive fiscal package at a time when the global economy appeared to be sinking into a black hole due to acute dearth of demand. Today China no longer has that deep pocket.
While the Chinese economy is plagued with the adverse effects of real estate bust, its stock market got crushed not only by this macro economic development but also by Xi Jinping’s brutal repression on capitalism and wealth creation. Beginning with a fierce attack on Alibaba’s Jack Ma in late 2021, Xi condemned tech entrepreneurs for amassing wealth, forcing them to kneel down to the Communist Party, making their animal spirits wither. Facing radically altered return prospects, foreign capital has stopped flowing into China to fund start-ups. Xi Jinping has no intention of becoming kinder to capitalists and the Communist Party’s influences keep growing on Corporate China, in favor of state-owned enterprises keeps.
In sharp contrast to denial of capitalism in China, Corporate Japan has moved to the polar opposite direction since the last decade. Along with Abenomics, the Financial Services Agency began to stress shareholder capitalism on Corporate Japan while deemphasizing stakeholders that had immense influences on how companies were run. The Japan Exchange, which owns the Tokyo Stocks Exchange, drove Japan’s management class to run their company to enhance shareholders’ a value, or their place in the TSE might be denied. The top-down drive for shareholders’ value made immense contribution on the Japanese markets’ lasting upward trend after a turnaround. China today is committed to different value.
China has had the first bear market rally in response to the first good news in months, while a structural bear market remains in progress. More bear market rallies are likely to emerge from time to time while debilitating downward pressure continues to persist. A structural bear market is overcome only when fundamental problems in the economy are fixed. To be specific, overcapacity is the economy needs to be taken care of. How it can be done is not yet certain.
About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.
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