Chinese stocks are showing signs of recovery, but investors are now wrestling with a familiar dilemma: the tension between President Xi Jinping’s long-term policy ambitions and the market’s appetite for short-term stimulus. This conflict has resurfaced as Beijing seeks to recalibrate its economy while addressing the pressures from investors eager for quick fixes.
The friction between the long and short-term priorities isn’t new. For decades, economists have advised Beijing to address structural issues within its $17 trillion economy, which many argue is overly dependent on state-owned enterprises (SOEs) and heavy subsidies. The so-called “Washington Consensus” has often urged China to pivot toward a more balanced, market-driven model, but attempts to enact such reforms have consistently clashed with investor impatience.
This tension became particularly evident last weekend when China’s Ministry of Finance (MOF) held an unexpected press conference, which stoked speculation about a potential major stimulus package aimed at ensuring the nation hits its 5% growth target for 2024. However, when the MOF refrained from announcing specific details or a substantial monetary commitment, markets reacted with disappointment. Futures slid initially, but by Monday, stocks had rebounded as investors reassessed the situation.
The shift in sentiment suggests that, despite the absence of a “bazooka” of fiscal stimulus, the market recognized signs of pragmatism in Beijing’s policy direction. This pragmatism, embodied in the MOF’s statements, could signal a more measured approach that balances reform with gradual economic support—something investors have been hoping for.
President Xi Jinping’s administration is attempting to walk a tightrope, balancing the need for short-term economic stimulus against the long-term goal of transforming China into a high-tech, innovation-driven economy. Economists have noted that while the recent rally in Chinese stocks suggests optimism, there’s a broader recognition that Xi’s team is focused on the future. They are less concerned with hitting growth targets for any given year and more focused on guiding China through its next industrial revolution.
Economist Harry Murphy Cruise of Moody’s Analytics noted that while the weekend’s MOF announcement checked many important boxes for the market, it lacked specifics on the scale and scope of new spending. Nevertheless, Cruise expects additional support measures to be introduced through the remainder of the year.
Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, praised the direction of the policies, even though details were sparse. “These policies are in the right direction,” Zhang noted. Despite a recent $6.5 trillion rout in the stock market dating back to 2021, the current rebound suggests that investors are beginning to see value again in Chinese stocks, especially given their lower valuations compared to U.S. markets.
Even after the recent rally, Chinese stock valuations remain relatively low. Chinese shares are trading at significantly lower multiples than their U.S. counterparts, where markets have reached new highs. Economist David Goldman from Asia Times pointed out that with a price-to-earnings (P/E) ratio of 11, China’s stock market appears undervalued. For context, the S&P 500 in the U.S. boasts a P/E ratio of 22.
Goldman attributes this difference to Beijing’s approach to market regulation. Unlike in the U.S., where tech giants like Google, Microsoft, and Amazon dominate, China’s government has actively worked to prevent monopolies, which has kept valuations lower. For instance, Alibaba currently trades at a P/E ratio of 27, while Amazon’s sits at 43.
While Beijing’s policies have created a unique market structure, they have also instilled confidence among investors that China won’t allow speculative bubbles or the unchecked growth of monopolistic firms. This cautious optimism has been reflected in the market’s response to the latest policy signals.
Though no large-scale fiscal stimulus was announced, investors remain hopeful that Beijing will introduce targeted support for sectors in need, particularly the property market and local governments burdened with debt. The incentive for more stimulus is rising, particularly given the recent weakness in exports and imports. In September, Chinese exports grew by just 2.4% year-on-year, a significant decline from the 8.7% increase seen in August.
Zichun Huang, an economist at Capital Economics, warned that rising trade barriers could further weigh on China’s export prospects, particularly in industries such as electric vehicles and green technologies. Though interest rate cuts in major economies, including the U.S. and South Korea, may boost demand in certain areas, political obstacles could continue to hamper growth in China’s key export markets.
Despite these challenges, Xi’s administration remains laser-focused on its long-term goal of transforming China’s economy through technological innovation and leadership in emerging industries. Investors are gradually coming to terms with the fact that while short-term growth targets are important, Xi’s government is more concerned with ensuring China’s dominance in the industries of the future.
The MOF’s weekend announcement, while light on details, gave investors a reason to believe that more support is on the way. Jing Liu, an economist at HSBC, noted that the press conference was an “upside surprise,” suggesting that Beijing’s current policy pivot is likely to continue. Liu highlighted that improving risk appetite is having a positive effect on both the stock and property markets, creating a “wealth effect” that could help sustain the recovery.
However, markets remain cautious. Economists warn that investors will closely monitor how these policies are implemented and whether they are sufficient to combat China’s structural economic challenges.
Goldman Sachs, for example, raised its growth forecast for China, now expecting 4.9% growth in 2023, up from 4.7%. The bank also raised its 2024 forecast to 4.7%, up from 4.3%. One of the factors behind this optimism is Beijing’s plan to deploy 2.3 trillion yuan ($325 billion) in local government bond funds during the fourth quarter of this year, part of a “back-loaded” spending plan aimed at supporting the economy.
Carlos Casanova, an economist at Union Bancaire Privée, also noted that Finance Minister Lan Fo’an’s comments about having a “fairly large” capacity to increase spending have provided some comfort to investors. However, Casanova cautioned that the timeline for fiscal measures remains unclear, with significant announcements likely postponed until the National People’s Congress Standing Committee meeting later this year.
While the markets are reacting positively to the hints of more stimulus, Xi’s administration has made it clear that it will not rely on the same playbook used in previous crises. Larry Hu, chief China economist at Macquarie Capital, doubts that Beijing will commit to a massive stimulus package akin to the one rolled out in 2008-2009 during the global financial crisis. Instead, policymakers seem intent on balancing short-term stimulus with longer-term structural reforms, such as deleveraging and reducing local government debt.
This restrained approach fits within Xi’s broader economic vision, which emphasizes high-quality development, technological leadership, and industrial policy over short-term gains. However, as George Magnus from Oxford University’s China Centre points out, this strategy carries risks. Without bold reforms to boost domestic consumption, reduce debt, and promote private enterprise, China’s economy may struggle to avoid boom-bust cycles fueled by inefficient capital allocation.
Magnus warns that while China is making strides in advanced industries, these “islands of technological dominance” exist within a broader economy plagued by imbalances and inefficiencies. If China is to achieve long-term economic stability, Xi’s government will need to undertake more ambitious reforms than those currently on the table.
As Chinese stocks continue their recovery, the markets are approaching a critical juncture. On one hand, investors are encouraged by signs that Beijing is willing to provide the support needed to hit its growth targets. On the other hand, there is an understanding that China’s longer-term challenges, from demographic shifts to rising debt levels, require more than short-term stimulus.
The upcoming National People’s Congress meeting will be a key moment for Xi’s administration to signal its commitment to deep, structural reforms. For now, the market remains cautiously optimistic, betting that China’s policymakers will strike the right balance between reform and stimulus to navigate this complex economic landscape. Investors are watching closely, trusting but verifying, as China attempts to get its economic groove back.
