China’s Pro-Growth Messaging Blitz Can Only Buoy Markets So Long

China is swarming investors with near-daily announcements of economic support, creating the impression authorities are going full steam to boost growth. But without more specifics, the question is how long the market euphoria can last.

(Bloomberg) — China is swarming investors with near-daily announcements of economic support, creating the impression authorities are going full steam to boost growth. But without more specifics, the question is how long the market euphoria can last.

Officials from the National Development and Reform Commission, the central bank and the Finance Ministry spent most of an hour-long press conference Friday reviewing existing policies and repeating pledges. Few new measures were discussed, with incremental and vague comments offered to extend some tax breaks or create targeted loans “when necessary.” 

The briefing by the NDRC, the nation’s top economic planner, was the eighth since the start of July, nearly the same number it held during the entire second quarter. Yet officials again failed to articulate concrete measures to address the problems ailing the world’s second-largest economy and vexing investors, from the property crisis and dire sentiment among private enterprise to stubbornly weak consumer confidence.

“They can only talk up the market for so long,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics. “At some point they need to actually deliver.”

The market is happy with the nice words, for now. China’s benchmark CSI 300 Index climbed for the second week, extending gains to the highest since early May. A gauge of Chinese developer shares has jumped 13% since top leaders signaled support for real estate. Along with related industries, that sector comprises some 20% of the economy, but it’s been mired in crisis for years. 

The state-owned Economic Daily published a commentary this week explicitly tying stock market fortunes to improving growth. The newspaper, which is affiliated with the State Council, stressed the need to “enable households to make money from investing in stocks and funds, so their intention to spend can translate into the ability to spend.”  

Some investors will enter this rally without believing in the rhetoric, said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis.

Without actions to back up the government messaging it’s unclear how long the markets will stay buoyed. People’s Bank of China governor, Pan Gongsheng, for example, met this week with several developers to hear about their difficulties. While Pan said the central bank would meet their reasonable financing needs, he didn’t provide details on what the latest changes would entail.

“We need to actually see some first-tier cities announce substantial easing measures, or perhaps even a national-level policy change,” Beddor said. “If we don’t get that, property sales will continue to slump and eventually capital markets will follow.”

To be sure, the bar for enlivening markets right now is low. Appetite for Chinese equities dropped as the nation’s post-pandemic recovery narrative quickly soured. Now, stocks are rising from what was a low base in a heavily shorted environment.

“China is too big to ignore, so you have investors entering and exiting markets on the slightest news” as they opportunistically trade between ranges, said Anthony Leung, portfolio manager at Pollock Asset Management Ltd. “Things are certainly improved from rock bottom, but they’re far from reverting to the old days.”

Turnover in the mainland has picked up this week after an unusual top-level pledge to “invigorate” capital markets in July, from President Xi Jinping’s elite decision making Politburo. In one notable sign of improving sentiment, traders have driven a rally in onshore brokerages, which are often known as a bellwether of excitement toward bull runs.

“This rally is to ride, but not chase,” Zeng Jiqing, managing director at Beijing Nuohua Investment Management Co. “Not because I’m not confident in the overall trend of the economy, but that there will be some who are not willing to be patient, and will sell if the gains accumulate.” 

Sentiment isn’t as high outside of the equities markets, with gains for China’s yuan fading in recent days as stimulus details remain slim and the US dollar gains strength. Government bonds, meanwhile, have declined on bets the supply of debt will increase, as the nation is expected to sell more notes to finance the recovery.

Then there’s the chance that structural problems in China’s economy mean small-scale support simply stops having an impact. Years of non-market friendly policies from Xi, combined with bruising pandemic controls that kneecapped industries overnight, has diminished confidence. Geopolitical tensions with the United States and other Western governments has also changed sentiment.

Demographic shifts are a key issue too, with China clocking its first population drop last year since the 1960s, foreshadowing concerns about weakening productivity.

“China is likely entering a new lower-growth era that will bring about new structural growth trends — and investors will need to be more active in selecting high-quality businesses,” said Steven Luk, chief executive officer at FountainCap Research & Investment in Hong Kong.

In the near term, at least, Beijing is trying to juice the economy through its flurry of measures for boosting consumer spending, car purchases and property lending.

Brock Silvers, chief investment officer at private equity firm Kaiyuan Capital, said the increase in official economic meetings, which often announce such measures, shouldn’t be taken as a sign officials are busily solving the crisis. “It’s a sign that government is at a loss as to how to deal with the current malaise,” he said. “In the meantime, they feed the market snippets of happy talk, trying to keep sentiment from going overly negative.”

“Authorities know they must act soon,” he added. “But the options aren’t improving with time.”  

–With assistance from Colum Murphy and James Mayger.

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