In our previous report (see “Views on Current Macro-Control Policies”), we systematically outlined the suite of incremental measures from the September 26 meeting, focusing on stock and real estate asset prices. The central government’s increased spending is supporting debt resolution. Currently, we observe a rise in real estate transaction volumes and stabilization of prices, with trading activity in the Shanghai and Shenzhen markets increasing and the Shanghai Composite Index stabilizing around 3200, indicating initial effectiveness of the regulatory measures. The sustainability of the real estate market is worth monitoring; since 2023, major policy shifts have typically resulted in short-term surges, but this round of growth has been notably larger. The Shanghai Composite Index reflects expectations surrounding the upcoming fiscal meeting concluding on the 8th. With uncertainties from both the U.S. elections and China’s NPC meeting looming next week, market sentiment has shifted from cautiously optimistic to more cautious.
In our previous report, we discussed trading implications related to Trump and Harris (see “Trading Logic of the U.S. Election”), ultimately focusing on where cash flow for China’s future economic growth will originate. Currently, there are three proposals for economic recovery that are generating significant discussion, each with implications reaching into the tens of trillions, potentially affecting the entire economy and proving difficult to reconcile with one another:
1. Fiscal Expansion with Structural Reforms: Led by economist Liu Shijin, this proposal advocates for targeted fiscal stimulus aimed at structural reforms. The rationale is that to achieve sustainable, moderate growth, China must expand its middle-income group and unleash consumption potential to support economic growth over the next 5-10 years. Fiscal spending should focus on non-market sectors like elder care, child-rearing, education, and healthcare, where government intervention can play a significant role. Liu advises against issuing consumption vouchers, as they are one-off measures that cannot drive sustained domestic demand growth over the long term. The challenge lies in the comprehensive reform of China’s social security system, which technically is not difficult, but requires alignment of incentives among local governments. Given the substantial fiscal transfers each year, achieving this reform seems unlikely as it contrasts with population migration trends.
2. Monetary and Financial Policy: Spearheaded by economist Yu Yongding, this school advocates for interest rate cuts and large-scale infrastructure stimulus. Within the current macro-control framework, these measures could provide short-term support for GDP; however, they may not effectively address employment challenges. Interest rate cuts face significant constraints due to declining net interest margins and rising non-performing loans in Chinese commercial banks, which can no longer absorb rapid rate reductions. Additionally, liquidity is stagnating within the banking system, meaning businesses are insensitive to loan rates, stock prices are unaffected by lower rates, and residential loan demand similarly does not respond to rate cuts. The pathway for large-scale infrastructure investment appears smoother, with available debt issuance mechanisms and a capable workforce to facilitate rapid deployment.
3. Welfare Economics with a Focus on Consumption: This approach emphasizes large-scale consumer stimulus, drawing lessons from the macro-control frameworks of the U.S. and Europe. While there is some merit to this perspective, it may not translate effectively to China’s context. Technically, distributing funds directly to individuals poses no significant challenges; however, given China’s high savings rate, the stimulus effect may be limited. If this approach fails to stimulate economic activity, it risks wasting valuable policy space and strategic transition time.
Regardless of which proposal is implemented, each will require time—at least two quarters—for evaluation. The next two quarters are critical for China’s economy. Concrete actions will await the fiscal proposals emerging from the NPC Standing Committee meeting on November 8. Our expectations for the upcoming fiscal policy include a focus on debt resolution, strategic stockpiling, and incremental policy and funding measures.