The stimulus unleashed by the People’s Bank of China (PBoC) last month was a tough act to follow. When it was the turn of the finance ministry to describe its role in boosting China’s subpar expansion, investors fretted about the absence of fireworks and demanded something more.
The risk is that in not consistently exceeding expectations, Beijing will be depicted as not very serious about a major reboot of its economy.
Finance minister Lan Fo’an conveyed a solid, if unspectacular, message on Saturday: More support will be forthcoming for the troubled real estate industry, government borrowing will likely be stepped up and assistance given to local authorities struggling with high debt. These are worthy undertakings that certainly won’t hurt, but more significant moves were anticipated.
Prior to the weekend, analysts expected the deployment of as much as 2 trillion yuan ($283 billion) in new measures, according to a survey by Bloomberg News, along with some initiatives to lift consumption. Lan provided no price tag and little by way of something fresh. Stocks fluctuated on Monday.
The problem is that the event lacked the wow factor of the central bank’s briefing on 24 September that ignited an epic stock rally. The PBoC conveyed something potent: cuts in interest rates, an easing of reserve requirements for lenders, and proposals to boost equities.
The bank also enjoyed the benefit of going first when expectations were low—and exceeded them. The finance ministry began talking in an environment where hopes were elevated.
Governor Pan Gongsheng knew his audience and delivered his lines with panache while markets were open. His performance was not too far removed from the televised question-and-answer sessions by Federal Reserve Chair Jerome Powell after policy decisions.
The episode is a useful reminder that fiscal policy isn’t as neat and tidy as its monetary sibling. It tends to be more nuanced, relies on local authorities, is subject to a certain amount of horse trading, and its effectiveness is measured by what’s actually spent rather than unveiled.
That’s not to say the whole show was a non-event. On Sunday, Goldman Sachs increased its forecast for China’s economic growth this year to 4.9% from 4.7%. (The government has targeted an expansion of around 5%.)
The last few weeks do show a commitment by officials to shore up the economy, the firm said. China’s ruling Communist Party has made clear that it recognizes there is a problem. The argument is about how forcefully to stoke demand and how measures are rolled out.
That the economy can use a lift should not be open to debate. The day after Lan’s appearance, figures showed consumer prices inched up 0.4% in September from a year earlier, less than economists projected. Without a jump in food, inflation would have been weaker still.
If the PBoC were an independent central bank with a formal 2% inflation target, like many of its peers, the cries for aggressive action would be deafening.
One of the trickiest aspects of setting policy is managing expectations. The optics can be as important as substance. If anticipations have been built, then whatever is announced risks being branded a failure. In retrospect, analyst notes curtain-raising the briefing were a sign that Lan was bound to fall short.
It’s important to remember, though, that this isn’t the end of the stimulus road. More will come. Circumstances demand it and top cadres show they’re attentive to these needs, if only to lock in the growth target set by President Xi Jinping.
Watching the lead-up to Saturday and then seeing headlines and commentary roll, I recalled Tim Geithner’s first major speech as US Treasury secretary in early 2009.
He had planned to address broad principles and outline the administration’s philosophical attitude toward struggling banks. Would the approach reflect continuity with former president George W. Bush, or would bigger agenda items, like nationalization, be on the table?
The problem is that in the days before the remarks, the White House had talked up expectations of a comprehensive plan to be unveiled, Geithner wrote in his book Stress Test.
That wasn’t what the Treasury intended—or desired. The result was a speech that came across as vague and was underwhelming; stocks sold off as he spoke. Would it have received quite the panning had not the audience been primed to hear something monumental?
Geithner recovered from that setback. So, in time, did banks and the broader US economy. Saturday was never going to be a great day for China bulls. The country faces a long road to recovery. There will be leaps, but also lulls. Beijing needs to start controlling the narrative. ©bloomberg
