Invesco, Nomura pour cold water over chances of China’s Politburo launching massive stimulus package

The Politburo is due to meet by the end of July to review China’s first-half economic performance and set the policy tone for the rest of the year
The June data ‘suggests a lower probability of robust stimulus measures’, Invesco says

China stock market

Zhang Shidongin Shanghai

Published: 4:00pm, 18 Jul 2023

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Investors hoping for potent stimulus measures from the coming Politburo meeting might be in for disappointment, after key data for June flashed some positive signals for China’s economy.

The June economic data has not deteriorated to an extent that would trigger large-scale rescue measures from top policymakers, who are wary of the side effects of leveraging and are more focused on sustainable and high-quality growth, according to US asset-management firm Invesco and Japanese brokerage Nomura Holdings.

President Xi Jinping and his 23 colleagues in the Politburo are due to convene a meeting by the end of July to review China’s first-half economic performance and set the policy tone for the rest of the year.

“The June data, which shows stabilisation across most sectors, suggests a lower probability of robust stimulus measures,” said David Chao, a strategist at Invesco. “The decision by China’s central bank to hold policy rates unchanged is a good example of this,” he said, referring to the one-year rate on the medium-term lending facility that was left unmoved on Monday.

The Politburo meeting is on stock traders’ radars, and they will look for any clues on how Xi’s government will steer the world’s second-largest economy out of a slowdown after growth momentum has moderated. Piecemeal measures aimed at reviving growth – from 10 basis-point cutbacks in borrowing costs to loosening of the property market in smaller cities – have so far failed to impress investors, with benchmarks of both onshore and offshore stocks lagging other key markets in Asia.

The CSI 300 Index dropped 0.4 per cent on Tuesday, extending the 0.8 per cent drop recorded a day earlier, while the Hang Seng Index slid 2.1 per cent as trading resumed after being suspended because of a typhoon in Hong Kong.

While the market was focused on China’s lower-than-estimated headline growth of 6.3 per cent in the second quarter when the data was released on Monday, some economists pointed out that some bright spots had been ignored. Industrial output expansion, for instance, exceeded projections in June and the year-to-date fixed-asset investments also beat estimates, implying that economic growth might have stabilised.

China’s gross domestic product came out at a good sounding despite being below market expectations, Clifford Bennett, chief economist at ACY Securities, said in a note on Tuesday. “The fact is that China is now in the process of achieving a kind of sweet spot for its economic structure and performance going forward,” Bennett said. “Now one of the world’s true super powers, it must achieve a sustainable growth path. And this it is doing.”

Nomura expects supportive measures to continue to be restrained in the second half of 2023, with two cuts in interest rates of 10 basis points each and some fiscal transfer to local governments. It raised the third-quarter growth forecast to 4.9 per cent from 4.3 per cent, and for the fourth quarter also to 4.9 per cent from 4.5 per cent.

“Markets should curb their expectations for a fast, cure-all package and instead embrace expectations of a growth slowdown to below 4 per cent in 2024,” said Lu Ting, an economist at Nomura.

History suggests the government has good reasons for delaying a huge stimulus package. A 4 trillion yuan (US$139 billion) package introduced during the 2008 global financial crisis fuelled runaway inflation and quick gains in home prices. A cycle of six cuts in lending rates from 2014 to 2015 led to a housing bubble and a quick boom-to-bust run in the stock market that wiped off US$5 trillion in value.

Given China’s rapidly decreasing return on assets, an infrastructure-led fiscal stimulus would need to be much bigger than before to have the same impact on the economy, a move that could put the country’s public debt well above the size of its economy and place China among the world’s most indebted countries, according to Natixis.

“The government will still implement supportive fiscal policy, albeit in a cautious manner,” said Yue Su, an economist at Economist Intelligence Unit. “After experiencing a challenging process of deleveraging, the government is more keen to ensure that public spending and investment will have positive spillovers to productivity or persistent household demand, rather than simply inflating growth figures.”

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