Beijing Lays Its Cards on the Table

A series of robust government efforts to revive the Chinese economy seem to have fallen short. This poses even a greater challenge than the stagnation itself, which the Communist Party of China (CPC) is striving to control. Alarming signals of the economic slowdown in China have been troubling Beijing since last year. However, it was only recently that the government, under the leadership of the Communist Party, attempted to implement massive measures to stimulate the stalled economic growth. The markets, however, are not convinced by the effectiveness of these efforts. As a result, the next round of stimulus measures will need to be significantly stronger than the current ones if results are to be achieved. Otherwise, the markets will expect far greater efforts and resources to revive the Chinese economy. While the Chinese government's capabilities are vast, they are certainly not unlimited. All of this is happening against the backdrop of trade wars and global military tensions.

On 8 October, the first working day after the week-long national holidays, known as Golden Week, there seemed to be positive news coming out of Beijing, but the markets weren’t entirely persuaded. The initial rise in the Shanghai Stock Exchange’s CSI 300 Index after the holiday week, and in anticipation of government announcements on economic support, was impressive. The index surged by 11%, but once the actual content of the programme became known, it dipped. In the end, growth remained at 5.9%, compared to 30 September, when the markets closed for Golden Week.

What is even more striking is the reaction of the oil market. Prior to this, the oil market had been rising due to two factors. To a lesser extent, this was influenced by the Chinese government's promises to stimulate the economy, with some measures having been announced as early as September. The second, and as it turned out, more powerful factor, was the escalation of tensions in the Middle East. However, even after 1 October, when Iran launched a massive missile attack on Israel, oil prices did not react immediately.

The rise began on 3 October, culminating in a price of $81.6 per barrel of Brent crude on Monday, 7 October. However, on Tuesday, following announcements from Beijing, oil prices fell back to $77.6 per barrel. And this may not be the end of the decline.

The Chinese economy is not just entering turbulence, but high turbulence.

The market is making a clear statement: yes, we are considering the tensions in the Middle East, but that tension alone is not enough to outweigh the concerns surrounding the prospects of the Chinese economy. China’s oil consumption is one of the key factors in the global oil market. The better the Chinese economy performs, the more oil prices tend to rise.

As the decline in oil prices followed Beijing's announcements on 8 October, the outlook for the Chinese economy does not appear promising. Moreover, given that the stimulus package unveiled on 8 October is seen by the markets as insufficient, the government will need to seriously consider the scale of the next stimulus package. It will need to be larger, more expensive, and will pose risks to prices. Yes, injecting money into the economy not only accelerates growth but also fuels inflation. The worse the situation, the faster prices rise ahead of the pace of economic recovery.

Beijing Presses the Accelerator

The slowdown of the Chinese economy has been occurring for at least a year. In July 2024, the International Monetary Fund (IMF), in its latest forecast, projected China's GDP growth at 5% for 2024. This is already lower than the 5.2% growth achieved in 2023. The IMF's July forecast for 2025 predicted growth at 4.5%.

All of this is happening against the backdrop of the Chinese government’s target of 6% annual growth, a figure that was achieved in 2019 and earlier. However, the COVID-19 pandemic disrupted the trajectory of continuous growth. Not only did it break the momentum, but it also exposed the structural problems within the Chinese economy. The 2.2% growth in 2020 was followed by a rebound to 8.4% in 2021, but then a slump to 3% in 2022, and 5.2% in 2023, as mentioned earlier. The pre-pandemic trajectory has not been regained.

The Chinese economy has behaved like a powerful motorcycle: one big rock under its wheels, and everything has been thrown off course.

The three pillars that have supported economic growth in recent years have turned out to be quite fragile:

• Domestic consumption was seriously hit by the aftermath of the pandemic.
• Exports suffered due to countermeasures from China’s traditional partners—the USA, Canada, and EU countries. These importing partners had grown weary of China's aggressive export expansion and began implementing restrictive actions, including rapidly raising tariffs.
• The property market was wildly overheated, leading to a cooling phase—with falling prices, problems for major developers, and an earthquake in the banking system, which had been heavily financing construction.

The situation for the Chinese economy has significantly worsened due to the country's direct and indirect support for Russia, which is waging an aggressive war in Ukraine. As a result of this policy, Chinese companies have faced sanctions from various countries, adding further pressure to the economy as traditional markets close off to Chinese goods.

The economic situation became so critical that after the events of July, there were even talks of a possible leadership change in the country. Although these rumours soon faded, the reasons for concern were significant: in July 2024, for the first time in 19 years, lending to the industrial sector decreased; production among the largest exporters of electric vehicle batteries contracted; construction slowed down, and property prices fell.

The bitter news continued into the next month: the National Bureau of Statistics of China’s Purchasing Managers' Index (PMI) fell from 49.4 in July to 49.1 in August. This was already a trend, marking the sixth consecutive month of declining sentiment. And since August was the fourth month in a row where the index remained below 50, this not only signalled a trend but also reflected poor conditions in industrial production. Something needed to be done, and the Chinese government began to take action.

The Government Steps In to Rescue

In September, the Chinese government unveiled a package of monetary stimuli, including reductions in interest rates and the easing of reserve requirements for banks, allowing them to hold less in reserves with the central bank. The goal was clear—reignite the property market. This, in turn, would lead to the recovery of the construction materials industry, metallurgy, and banking. But, so far, it seems that nothing of the sort has occurred. Although the Purchasing Managers' Index rose from 49.1 to 49.8 in September, this increase appears more like wishful thinking. This is evident, for instance, in the dynamics of oil prices. Throughout September, oil prices fluctuated within a narrow range of $68.8 to $74.5 per barrel, ending the month at a pessimistic $71.7 per barrel of Brent crude.

Nonetheless, the injection of money into the economy and the anticipation of a new round of stimuli from the government led to a 25% surge in the CSI 300 Index in the last week of September. At this point, it’s worth remembering oil consumption as a marker of economic recovery, rather than a stock market bubble. Often, stock markets inflate not because of a robust economy but due to an excess of money. This was the case with stock markets in developed countries after the COVID-19 pandemic, when trillions of euros and dollars were printed—they grew despite weak economic performance.

Just before the announcement of the new stimulus package on 8 October, there was also a slight uptick in the Chinese stock market, as mentioned earlier. However, it ended rather weakly, as the announcement by the Chinese Economic Planning Agency failed to impress investors.

How can this stimulus plan be characterised? The most accurate description would be: “There won’t be too much money, we don’t want to take risks.” Specifically, the head of the National Development and Reform Commission (NDRC), Zheng Shanjie, announced that the government would provide $14.1 billion (equivalent to 100 billion yuan) in additional public procurement through the 2025 budget. This will be in addition to the same amount for funding construction projects. Totalling is around $28.2 billion to stimulate an economy with an annual GDP of $17.8 trillion.

Given that analysts were expecting a stimulus package of at least $200 billion, their disappointment spilled into the markets, causing corrections in Chinese stock prices, and even more so in oil prices.

The most notable part of Zheng Shanjie’s speech was his reference to the 5% target for annual economic growth, while also acknowledging that the economy faces difficulties and an increasingly "complex and extreme" global environment.

Zheng also mentioned enhanced support for small and medium-sized enterprises to help level the playing field with large state-owned corporations.

To support housing sales and property prices, Zheng promised certain comprehensive policy measures, though he did not go into detail about what these entailed.

In mid-September, Bank of America downgraded its forecast for China’s GDP growth in 2024 to 4.8%, and Citigroup lowered its estimate to 4.7%. It is unlikely these forecasts will be revised upwards anytime soon, despite the announcement of the new stimulus package on 8 October. Many analysts believe the current package may only stabilise the situation, but it is unlikely to reverse the trend.