China Economy – Semi-Serious

More than the PBOC is needed.

• China has taken a raft of measures that are finally big enough to stimulate the economy but if China really wants to see a renaissance, it will need to give the private sector more space to invest, create, succeed or fail and critically, make money.
• After 18 months of drudgery and depression, China’s 2024 5% GDP growth target is at risk and, as minor tweaks have done very little, the People’s Bank of China has finally acted more drastically.
• The main measures include:
  • First, mortgage rates: which have been cut by 50bp to around 3.0% from 3.5% which will reduce the interest cost on mortgages by around 14%.
  • This goes hand in hand with a reduction of the minimum down payment for a property to 15% from 25%.
  • China’s real estate market is currently in a dreadful state with multiple developers going bankrupt and thousands of unfinished and empty apartments across the country.
  • Many Chinese retail investors are also experiencing negative equity on their properties and so any relief on their costs will free up cash to potentially revive consumer expenditure.
  • The PBOC has tweaked these rates before and this is the first proper intervention since the end of the pandemic, but whether this measure is effective remains to be seen.
  • Second, headline rate cut: where the seven-day reverse repo rate will be cut by 20bp to 1.5% from 1.7% representing a 12% cut in interest costs for borrowers.
  • The PBOC also cut the reserve requirement ratio by 0.5% meaning that local banks will have more money to make available to borrowers at lower interest rates without having to take more deposits from savers.
  • The idea here is to inject liquidity into the economy to spur GDP growth.
  • Third, stock market support: where the PBOC will set up a swap facility that will allow firms easy and simple access to central bank capital to purchase Chinese equities.
  • This will be RMB800bn in size with the possibility to add another RMB500bn if needed over time.
• The market welcomed these moves with large technology up 3% – 5% and the largest state-owned banks up around 5%, but the long-term success of these measures is very uncertain.
• Previous measures have resulted in a burst of very short-term enthusiasm which quickly returns to depression as the measures have little long-term impact.
• These measures are by far the largest measures taken since the pandemic and signal a recognition by the CCP that the economy is not going to turn around without a shift in policy.
• However, I don’t think that these go far enough as the heavy hand of the state continues to hover above many of its industries and technology in particular.
• There is nothing in these measures that is likely to encourage founders to start companies again or for investors to relax the onerous demands that they are placing on start-ups in return for financing.
• Start-ups, entrepreneurs and VCs are the lifeblood of innovation as it is in this segment of the technology industry where it all begins.
• To fulfil its long-term ambitions, this part of the technology sector needs to be brought back to life.
• The problem here is that Chinese technology remains moribund mostly as a result of the uncertainty created by regulatory oversight and the perceived disdain of the state for the private sector.
• Consequently, I don’t think that these measures will do much to fix sentiment and activity in the technology sector which looks set to have yet another rotten year (see here).
• China’s Technology sector still looks to me like a classic value trap as I do not see policy changing and think that the technology sector will continue to wither.
• China is home to some of the cheapest technology companies in the world, but it looks like it will stay that way for now.