(Public) China's Incredibly Out-Of-Touch Stimulus Policy
From not-so-urgent to out-of-touch. How to think about China's fiscal stimulus policies.
Editor’s Note: This article was first published to HFI Research paying subscribers on Nov 8, 2024. Given the backdrop of China’s latest monetary policy change, I think it’s good for all readers to read our piece on the inevitable increase in stimulus policy.
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I am officially changing my stance on China's fiscal stimulus policy. Instead of calling it the "not-so-urgent" fiscal stimulus policy, I'm changing it to the "out-of-touch" stimulus policy.
From an economic standpoint, China's recent fiscal stimulus announcement centers around debt management and risk mitigation rather than spurring economic and consumption growth. To me, this is just backward thinking.
Take a step back and imagine that we are in the middle of COVID-19, and instead of the crazy stimulus package the US announced ($3.58 trillion or ~17% of 2020 GDP) to spur growth again, we focused on "reducing" the Federal deficit and containing our borrowing. US economic growth would have likely suffered for years to come and the unemployment rate would have remain elevated. Millions would be out of jobs still and families would still be fighting to claw their way back.
Just look around the globe. Every other country that didn't respond in the same speed and manner the US did is still suffering the aftereffects. China is no different, and if you visit Shanghai today and talk to some of the people who reside there, they still bring up the trauma that happened in March/April 2022 as a sign of distrust of the government.
The Shanghai lockdown still lingers in many people's minds. After nearly 15 months of the Pfizer vaccine announcement, the fact that China still pursued a zero-COVID policy was not only asinine but stupendously preposterous. Some might call it illogical, I will just call it out-of-touch.
And when it comes to stimulating the economy, the policy announcements so far are no different. Instead of tackling the major issue (the property market) all at once with clear objectives and strict deadlines, policymakers are going the route of "responding to market dynamics". The wishy-washy approach almost guarantees an early failure followed by desperate policy measures in the end. What the Chinese fail to realize in this case is that this is a confidence game, and without a bazooka, it's going to fail 100 out of 100 times.
Waiting for the Obvious
To many world leaders, the zero-COVID policy was nonsense from the start. For some, anchoring bias prevented them from seeing that inevitable, and for others like China and Australia, protests on the streets needed to happen for them to act urgently.
In my recent meeting with Investing In China, he pointed out to me that if you lived in China (in 2022), the zero-COVID policy ended overnight. It was as if a magic switch flipped in the minds of the policymakers, and everyone realized how stupid of a policy it was.
So in many ways, China is not stubborn, but why did it have to wait until it was so disgustingly obvious to change its ways?
I suspect that the fiscal stimulus route will be no different. Right now, policymakers continue to look at stabilizing growth as opposed to promoting one. This is the wrong approach and economic figures will pay the price for that.
What to Expect?
For now, I'm seeing some of the China bulls get overly excited by the jump in property sales in tier 1 cities and the rebound in consumer spending. What they fail to realize is that this is a short-term blip.
Tech companies like Alibaba and JD might report strong numbers for Q3, but readers must know that without more fiscal policy from China, the underlying headwind is far too strong.
At some point in 2025, it will be obvious that whatever announcement that has been made so far will be insufficient. China has to launch a bazooka, and I think the size has to be somewhere between 15% of GDP or $2.67 trillion (19 trillion yuan). Anything short of that will only be sufficient to keep China in a slow and steady growth state. The lack of an economic boom will forever keep China's elevated debt profile a concern. The only way out of this is via economic growth. The US did it this way, and China will have to realize this sooner or later.
But given what I stated earlier, China's policymakers won't have that ah-ha moment until it's too obvious. This means that things will need to get worse before it gets better. And when it comes to oil demand, this may be no different. I suspect that while we are seeing signs of demand bottoming in China, we won't get the boom we expect, so oil prices will remain in this low range until there's an obvious catalyst (more fiscal stimulus announcements).
When the Obvious Comes
There will be a day when the obvious comes. If my thinking is correct on this, China will eventually announce meaningful fiscal stimulus. And when it does, commodities across the globe will shine again. Natural gas will shine via global LNG prices. Coal prices will balloon. Oil will shoot higher just as non-OPEC supplies start to peak. And the pain of the commodity investor will pay off.
But when is that obvious moment going to come?
I don't know the precise timeline. But if I had to guess, I think it will be after Q1. Unless China announces more meaningful stimulus announcements by year-end, the recent announcements will fizzle, and economic growth will worsen again.
I don't think it will be long. And when the economic data worsens in the face of all the current stimulus announcements, policymakers will turn from "out-of-touch" to "I am f***ing desperate". That's when you know the tide has turned. Until then, position accordingly.
Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.