At the end of last month, the People’s Bank of China (PBOC) surprised markets by cutting short-term interest rates (from 1.7% to 1.5%), reducing banks’ reserve requirements ratio by 50 basis points (bps), and launching a lending facility fund to encourage share buybacks and investment in domestic equities. The PBOC’s press conference was followed by a statement from China’s Politburo, which said it would step up fiscal spending to support growth.
Until these announcements, the Chinese government had stubbornly resisted calls for more aggressive monetary easing to ward off deflationary pressures that have afflicted the country for two years. Neither has there been much by way of fiscal measures to support domestic consumption. Consequently, Chinese stocks had fallen for over three years. Before the announcements, the benchmark CSI 300 index had lost nearly 45% from its peak in February 2021.
In the week following the PBOC’s announcement, the CSI 300 rose by more than 24% — its best performance since November 2008. The Hang Seng index rose by 21% in two weeks. However, the rallies in Hong Kong and mainland China now appear to be over. On Oct 8, a press conference by the National Development and Reform Commission (NDRC) did worse than fall short of market expectations; the dearth of substantive measures to bolster domestic consumption and private investment caused the Hang Seng index to fall by more than 9% on the same day.
Perhaps the only thing more dramatic than the turbulence of Hong Kong and Chinese stock markets in recent weeks has been the mental gymnastics of China bulls and optimists as they try to explain the actions of a government prone to giving mixed signals, sudden reversals, and policy U-turns.
Recall, for instance, how the Chinese state abruptly swung from a strict zero-Covid policy to a de facto Covid-for-everyone policy at the end of 2022 — leading to the very dystopia that Chinese state media had, for the previous two years, mocked Western countries for. A few months later, the Chinese authorities brazenly declared that China’s Covid policy had been “completely correct” even as they scrubbed references to the very policy that had traumatised the economy during the pandemic.
When one tries to attribute consistency, intentionality and rationality to such dramatic policy U-turns, it is hardly surprising that their “explanations” are a mixed bag of implausible claims, ex-post rationalisations, non sequiturs, and wishful thinking.
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Before the monetary stimulus announced by PBOC three weeks ago, China bulls were saying that a stimulus was unnecessary and unhealthy for China’s development. They claimed that a sizeable stimulus would undo the progress China has made in moving away from speculative investments, mostly in real estate, to a “high-quality” development model driven by advanced manufacturing and cutting-edge technologies. Deleveraging was framed as a necessary process, even a desirable one, as the economy unwound years of debt-fuelled investments in real estate.
They also pointed to the US as an example of how fiscal and monetary stimuli led to high indebtedness, an economy built on financial speculation and asset bubbles, over-consumption, and runaway inflation. By contrast, China was a model of financial and fiscal rectitude; it will not run the risk of reflating the bubbles that the authorities had successfully deflated in the last few years.
China bulls also argued that the authorities had little to learn from the experience of the US during the Global Financial Crisis (GFC). They pontificated that unlike the fiscally reckless US or economically depressed Europe, China was exceptional in maintaining a careful balancing act between growth and sustainability.
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More egregiously, some even said that China was undergoing a “beautiful deleveraging” as part of its transformation into a high-quality, developed economy. According to these defenders, “a US$1 trillion [$1.3 trillion] property bailout is the last thing China’s economy needs,” and the falling stock market was a necessary and even healthy adjustment as China pivoted away from property investments and financial speculation to “new quality productive forces” (party speak for advanced manufacturing).
But when the PBOC did a volte-face and unleashed China’s version of a monetary stimulus that included unprecedented measures to boost domestic equities, China bulls immediately applauded the moves even though intellectual integrity required the opposite. Their “explanation” now was that after stomping on real estate developers such as Evergrande and stabilising the property market, the time was ripe for the authorities to ease credit conditions and pump prime the economy — starting with the stock market.
The stock market rally that followed the PBOC’s announcements was thus hailed as a sign of the Chinese economy roaring back to life and as evidence that the naysayers who predicted that China would fail to meet its 5% growth target for the year were wrong. Any suggestion that the stock market rally would be short-lived was shot down. Similarly, concerns that the stock market rally might become a bubble were rubbished; Chinese equities, the bulls insisted, were still undervalued.
For China bulls, the stimulus announced by the PBOC marked the culmination of a highly coordinated series of policy measures taken to prevent “the disorderly expansion of capital” (the Communist Party’s favoured justification for any crackdown on private enterprises), restructure the economy, and upgrade its technological and productive capabilities. The regulatory crackdowns of the last three years — on property developers, internet platform companies, private education, and others — were now framed as part of a well-conceived plan aimed at draining the economy of its excesses — even if that led to sluggish growth and falling prices.
In the new narrative of China bulls, the problems the Chinese economy has struggled with in the last two years — deflation, decline in asset prices, deleveraging and falling corporate profits — were not sacrifices in vain. Instead, they were the planned and intended consequences of China’s upgrading efforts. These bulls also confidently predicted that China would soon launch a big fiscal bazooka that would extend the stock market rally and catalyse a wider economic recovery — enabling China to hit the target of 5% GDP growth.
But that fiscal stimulus did not come. The Oct 12 press conference by the Ministry of Finance provided few details on the measures that would be taken to boost household consumption other than saying that the government would increase debt issuance to support the property market, recapitalise state banks, and support low-income households.
Of the measures announced on Oct 12, the most significant was a plan to extend the use of local government bond proceeds to support the property market and inject capital into large state-owned banks. This measure, if implemented, would be no different from what the US did during the GFC. It most resembles the Troubled Assets Relief Program in which the US Treasury bailed out systemically important financial institutions by purchasing preferred shares. Meanwhile, the monetary easing announced by the PBOC three weeks ago resembles the quantitative easing undertaken by the US Federal Reserve at the height of the global financial crisis. So much for Chinese exceptionalism, these measures are more like socialism with American characteristics.
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At the heart of the eternal, but mostly unjustified, optimism of China bulls is their unshakeable belief that the Chinese state is exceptional. For the bulls, it is unusually intelligent, far-sighted, and meritocratic; it formulates policies rationally based on science and evidence; and it is a government for the people rather than one captured by vested interests.
Viewing the Chinese government through this prism of exceptionalism makes it hard for China bulls to imagine that the authorities might be unpredictable, capricious, and prone to sudden U-turns. Hence, when the policy reversals and U-turns occur — as they inevitably do, China bulls must construct elaborate and often implausible theories to “explain” them. Not doing so would cause too much cognitive dissonance.
The reality is that the Chinese state is not all that exceptional. Like the governments of most countries, it is often myopic and torn between short- and long-term goals; ideology and loyalty regularly come into conflict with rational, meritocratic decision-making; and there is a large gap between (legitimate) policy goals and the Chinese state’s capacity to achieve those goals. In short, the reason the China bulls often get it wrong is that the authorities are themselves often wrong.
Donald Low is senior lecturer and professor of practice at the Hong Kong University of Science and Technology.
