China is preparing for a “whatever it takes” moment but not yet

Recently, Chinese government has introduced a series of stimulus policies, including lowering interest rates, cutting the reserve requirement ratio, and creating a couple of PBoC- funded credit policies to support the equity markets. Shortly after, news reported that the government may issue two-trillion-yuan special treasury bonds to further boost fiscal measures, although this has not been fully confirmed yet.The launch of several policies under the official label of stimulus is unprecedented in recent years. Notably, the speech by the Governor of the People's Bank of China was exceptionally forceful, giving the impression of China’s own “whatever it takes moment", paraphrasing Draghi in his role as president of the European Central Bank during the European sovereign crisis.China is not yet facing the same crisis as the Eurozone did at that time, nor does it convict this is such a moment. The situation is evolving, especially taking into consideration that Trump will threaten a 60% tariff on Chinese imports, which could quickly escalate the already challenging geopolitical outlook.While the government announcement may not be a full-scale measure, it is certainly a positive step. The immediate impact of these policies has already been felt, with the Shanghai Composite Index and Hang Seng Index climbing rapidly, and the renminbi appreciating quickly. Therefore, there’s no question that these strong, unexpectedly aggressive policies have significantly boosted market confidence. After all, market expectations for China’s economic policy have often fallen short over the past few years, but this time, the rapid adjustment in expectations has quickly reflected in asset prices.In addition to the monetary expansion, there is also news reporting that China may additionally issue special treasury bond, which will help reverse the current downward trend in fiscal spending growth (shrinking by-2.9% during the first eight months of the year). In the first eight months of 2024, China's government spending was 22.21 trillion yuan, down from 22.86 trillion yuan in 2023. With a growth rate similar to the 5% GDP growth target, ideal spending should be around 24.00 trillion yuan, creating a gap of 1.79 trillion yuan, or an annualized 2.7 trillion yuan. At the same time, fiscal revenue reached 17.46 trillion yuan, down from 18.58 trillion yuan last year, leading to an estimated annualized gap of 1.47 trillion yuan. Combining these gaps indicates China may need to issue over 3 trillion yuan in special government bonds for stimulus.As such, despite the current surge in market optimism, the lasting effects will need additional policy supports and take time to manifest, with the real test lies in whether the economic fundamentals can follow suit. China’s economy is currently dealing with major issues such as persistently low inflation, weak real estate prices, and declining credit demand. The key indicators to watch for a real fundamental recovery will be CPI/core CPI, property price and transaction, as well as total credit growth. Only once we see real improvements in these areas will market confidence be fully restored.Therefore, the policy stance must remain consistently accommodative, in line with the current trend, as any policy hesitancy or reversal could possibly lead to rapid market corrections. Fiscal policies are expected to exceed two trillion to achieve desirable effects. This will require a strategic shift in the government’s approach - from focusing on supply-side reforms to stimulating demand and asset prices. This will not be an easy job. The real estate market, in particular, has been under pressure for a long time and cannot be revitalized in a short period. The CPI is still far below the desirable target. Achieving these economic goals will require government’s persistent determination over the next few months.In other words, it will take considerable time for these policies to translate into a full recovery. Furthermore, the geopolitical tension surrounding China has also been uncertain. The possibility of a Trump-style tariffs could prompt further policy support in China. We shall closely watch these policy updates.