Policy-makers to give strong stimulus, A-share stock market reacted, moderately

by SIG

On December 10, the Chinese A-share stock market (Shanghai and Shenzhen) opened high but closed low, with a trading volume of 2.2 trillion yuan, which can be considered a one-day market trend:

The Shanghai Composite Index opened with a gain of over 2%, and various indices surged by more than 3%, clearly responding to the statements from the Politburo meeting.

The Politburo meeting sets the tone for the upcoming economic work conference. When discussing this year's economic work, it stated that 'the main goals and tasks for economic and social development for the whole year will be successfully completed.' This means that, although several economists, including Gao Shanwen, are questioning China's GDP figures, the decision-makers believe that the '5% target can be successfully achieved.' How will this be accomplished? The official statement explains:

Next year, we will adhere to the principle of seeking progress while maintaining stability, promoting stability through progress, innovating while upholding integrity, establishing first and breaking through later, integrating systems and cooperating synergistically. We will implement a more proactive fiscal policy and moderately accommodative monetary policy, enrich and improve the policy toolbox, strengthen extraordinary counter-cyclical adjustments, utilize a 'combination punch' of policies, and enhance the foresight, relevance, and effectiveness of macroeconomic regulation.

After 14 years, the term 'moderately accommodative' has appeared again. Although decision-makers have stated that the economic development goals can be 'successfully completed,' they are clearly feeling pressure, especially with the possibility of President Trump returning to office next year, which could reignite trade disputes. Hence, there is a need for strong stimulus once more:

1, The last occurrence of 'moderately accommodative monetary policy' was at the end of 2008 when planning for the 2009 economic work. The exit from this policy tone came at the end of 2010 during the planning for 2011 economic work. After 14 years, China has returned to 'moderate accommodation,' which is also the first announcement of this monetary policy tone since the end of 2012.

2, The term 'more proactive fiscal policy' is actually more familiar: the last appearance was in July 2020, in response to the initial impact of the COVID-19 pandemic.

3, The expression 'extraordinary counter-cyclical adjustments' is a first in history. It remains unclear what qualifies as 'extraordinary' and will require further observation. Judging purely from the literal meaning, it seems that the stimulus will far exceed the 4 trillion yuan package of 2008.

The document outlines overall work requirements as follows:

Implement more proactive and effective macro policies, expand domestic demand, promote the integration of technological and industrial innovation, stabilize the real estate and stock markets, prevent and mitigate risks in key areas and external shocks, stabilize expectations, stimulate vitality, promote sustained economic recovery, continuously improve living standards, maintain social harmony and stability, and achieve high-quality completion of the '14th Five-Year Plan' goals, laying a solid foundation for a good start to the '15th Five-Year Plan.'

Specific tasks include:

Vigorously boosting consumption and improving investment efficiency to comprehensively expand domestic demand.
Leading the development of new productive forces through technological innovation and building a modern industrial system.
Utilizing economic system reforms to drive the implementation of landmark reforms.
Expanding high-level opening-up to stabilize foreign trade and foreign investment.
Effectively preventing and mitigating risks in key areas, ensuring no systemic risks occur.
Continuously consolidating and expanding poverty alleviation achievements, advancing new urbanization and comprehensive rural revitalization, and promoting urban-rural integrated development.
Increasing the implementation of regional strategies to enhance regional development vitality.
Collaboratively advancing carbon reduction, pollution control, and green growth, accelerating comprehensive green transformation in economic and social development.
Enhancing the guarantee and improvement of people’s livelihoods, increasing the sense of gain, happiness, and security among the populace.

In summary, three key expectations are concentrated in the market:

1, Expanding domestic demand comprehensively.

2, Stabilizing the real estate and stock markets.

3, Expanding high-level opening-up to stabilize foreign investment and trade while attracting more foreign capital back.

The policy signals are clear; however, the high opening and subsequent decline in market performance indicate that market confidence is not sufficient.

Market confidence is lacking, primarily because under the policy statements of 'wanting this, wanting that, and wanting even more,' the range of policy choices is very limited, and the space for policy stimulus is shrinking, leading to diminishing effectiveness. In other words, while the Chinese government used 4 trillion yuan to stimulate the economy in 2008, by 2025, it may not be able to muster 4 trillion yuan, and even if it could, the impact of the stimulus would be far weaker than it was at that time.

For example, the first point, 'expanding domestic demand,' is nearly a consensus among all economists. At the beginning of December, the 'Understanding China' international conference was held at the Yuexiu International Conference Center in Guangzhou, where Joseph Stiglitz, a professor at Columbia University and Nobel laureate in economics, delivered a speech.

Stiglitz has always been friendly towards China, and in his speech, when discussing the challenges China faces, he emphasized: 'It is necessary to increase the proportion of labor income in various ways.'

However, in the context of an economic downturn (which is a significant difference from 2008), how can domestic demand be expanded? If a U.S.-style approach of directly giving money (or vouchers) is taken, how much should be distributed? To whom should it be given? How will it be distributed? More critically, local finances are strained—where will the money come from? How can we avoid rent-seeking and corruption in this process? Most importantly, the decision-makers do not endorse such methods. Xi Jinping has stated: 'High welfare has fostered a group of "lazy people"; China will not engage in this.' Direct cash distribution clearly resembles the 'high welfare' practices that Xi detests.

If the aim is not to have residents directly increase consumption but rather to use a Keynesian approach of government-driven consumption, can this really increase what Stiglitz refers to as 'the proportion of labor income'? It is likely that the conclusions of the Chinese Communist Party's decision-makers are not optimistic.。

The Politburo's tone indicates that this year's economic work conference is unlikely to produce any unexpected highlights. Therefore, the response of the A-shares essentially reflects the impact of this news: a high opening but a low close. Will a genuine bull market emerge? It's difficult.

National income distribution refers to the allocation of interests among the state, enterprises, and workers (as stated in the China Banking Research Institute's interpretation of the CPC Central Committee's 'Decision on Further Deepening Reform to Promote Chinese-style Modernization'). Increasing the proportion of labor income in national income implies reducing the distribution ratios for the state and enterprises.

The prominent representative of the 'distribution ratio for the state and enterprises' is state-owned enterprises (SOEs). However, following the Third Plenary Session of the 20th CPC National Congress in July this year, the CCP has set the direction for economic development in the coming years: it will rely on Xi's so-called 'new productive forces' to enlarge and strengthen SOEs. This essentially represents a disguised statement of state advancement and private sector retreat. Under the premise of state advancement and private sector retreat, how is it possible to actively reduce the distribution ratios for the state and enterprises while increasing the proportion of labor income in national income?

Risk alert: Fiscal policy may underperform expectations, and policy implementation efficiency may be low.。

Neo Zion 513

2024年12月12日星期四

Policy-makers to give strong stimulus, A-share stock market reacted, moderately

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