China Unleashes Stimulus Blitz in Push to Hit Annual Growth Goal

Published Sep 24, 2024, 2:10 AM

Featuring:

Katia Dmitrieva, Bloomberg Asia Economics Correspondent

Ben Emons, Founder and Chief Investment Officer at FedWatch Advisors

Minxin Pei, Bloomberg Opinion Columnist 

 Apple: https://podcasts.apple.com/us/podcast/bloomberg-daybreak-asia/id1663863437
Spotify: https://open.spotify.com/show/0Ccfge70zthAgVfm0NVw1b
TuneIn: https://tunein.com/podcasts/Asian-Talk/Bloomberg-Daybreak-Asia-Edition-p247557/?lang=es-es 

Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg Daybreak Aisia podcast. I'm Doug Krisner. You can join Brian Curtis and myself for the stories, making news and moving markets in the APAC region. You can subscribe to the show anywhere you get your podcast and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.

Joining us now on the program is Katia Dimitrieva, Bloomberg Asia Economics correspondent, to take a closer look at the PBOC briefing this morning. So I just ran through the cutting of interest rates, the freeing up of banks to loan more with the drop in the triple R. There also lowering the down payment on second homes. One of our correspondents is James Mager. I know him to be a pretty sober individual. Katya, he says, my hands were shaking as I sent the headlines out. What a bazooka from the Central Bank. I don't think I've ever seen such an announcement before in China. Katya Dmitrieva, do you agree?

Well, it's not only a big announcement, it also came in about seven minutes, so you have one of the top officials in China sitting down with the media. He said, good morning, so good to see all of you. And then, you know, seven minutes straight of just announcements of various cuts to loan rates, to r rate that's how much banks need to hold in reserve, to mortgage rates.

So there was.

Quite a lot. The question though, and I appreciate the commentary on James, I know it was a definitely big announcement from what compared to what we've seen from China recently. The question is, you know how much it'll really impact an economy that is so deep in a hole right now in terms of consumer spending but also the effect of deflation. You know, if you were announcing these policies a year ago, a year and a half go, particularly the housing market component, this would be a very positive development. You know, you're seeing markets already reacting to the thoughts of you know, the interest rate moving down, yield to move down as well. So it would have been a very big kind of Bazooka style which is the term we use for this for China's fiscal stimulus at this size would have had a bigger impact if you had announced it a year, year and a half go now not so sure. Not sure essentially if this is enough. And we're already seeing some economists saying that.

You know, it's very interesting. I was looking at the headlines one from the government that we will soon have a release of six new measures to support MNA, which I thought was very interesting, and that in my mind goes right to the overcapacity story. Now, I know that's a loaded term, so let's not use it. I'll put it aside. But in one industry, let's say, and as example, electric vehicles, where there's so much over capacity, is something like this design to begin to intentionally make the economy maybe a little bit more efficient, to shrink it just a bit. Now, that could have second and third order effects that might be unwelcomed.

Yeah, it could make it more efficient, It could make m and A could make the markets just a bit more active. And this is something that the government has been messaging for over a year now. You know, alongside this view of high quality development, it's always oh, we also want to support the equity market. We want to support the markets. This could definitely do that. At the same time, it's tough when you have a government, especially this year, and at this point in the year, that's messaging a five percent or about five percent growth target, and you have companies and provinces and cities that are incentivized to reach that target. So M and A and purchasing other companies and perhaps growing their business that way, Maybe that's not necessarily the priority. The priority is trying to get to that five percent growth target by any means necessary, and we've seen that impact across the board.

Some of this is targeted at companies and some is targeted at consumers. Obviously, the refinancing tool for listed companies and shareholders to buy back shares is something that's getting some commentary in our Top Live blog. I'm curious whether or not you think that this does actually move the needle for the average consumer.

It's again, it's hard to say. I mean, it is true that in China about ninety percent of people own their homes. That's a big difference from other countries. So if you cut the market rate on existing loans, then you free up quite a bit of capital. But the issue China is not necessarily that people lack money. I mean, there's almost a record in savings right now. It's more the ability or likelihood or interest in spending that money. It's not clear that these policies so far are going to make people feel more comfortable or stable about the market, especially when doesn't really do much for the labor market. I mean, that's been a key area of concern. You have, you fun employment that's the highest all year. You've got other indicators that are showing people are not getting raises, people are getting cuts to their pay, people are losing their jobs, even in the white collar space. None of this really addresses that.

So, Kantia, if you're looking at the policy response today kind of from outside of China, would you be a little concerned that this is maybe going to add a little bit of well more leverage. And I think maybe if that is true, that there is going to be a little bit of concern about that fact.

It's totally fair concerned to have in a country that's already has such a high debt, when you know, compared to other countries. I think it's not you know, China doesn't really have a choice right now. This is sort of a similar issue, and this is frankly why a lot of officials have been hesitant to unveil these kinds of moves up until now, up until sort of this pain point where more and more Wall Street economists are saying they're not going to reach five percent this year and also revising lower their estimates for future growth, so they kind of have no choice.

Gatia, thanks so much for joining us. So we'll be watching the markets this morning and see how big the impact is. Katia Dimitriev, Bloomberg Asia Economics Correspondent Again, just very briefly, PBOC Governor Pangong Shong has announced these policies. The announcement to lower the banks reserve ratio requirement by fifty basis points, cutting the seven day reverse repo rate by twenty basis points, and cutting the outstanding mortgage rate. Ben emmon Cio and founder at fed Watch Advisors. Ben, thank you very much for coming on the show with us. Well, I suppose if you believe in mark to market, the FED would seem to have a lot of work to do here and the way Neil Kashkari outlined it, as you pointed out, the FED can cut one hundred and fifty basis points in fairly short order. Are you in that camp?

Yes? I am Brian and great to be back on with you and dark though, first of all, it's not the eighth anniversary of Day Make Asia Radio, right, and we've been together on this show.

We hit nine years exactly last week, and I remember you with us pretty much the.

Whole run exactly exactly. Oh not ys tare Y. So but thank you very much to forget for having me back. Yes, I am in that camp, and you know, the way I come down to it is that I think that by the way Neil Cascari outlines is a bit wonkish, but the outlines are well, you got to really think in real terms, right, accounting for inflation, and that was I think the worry from war that came through on Friday was like he saw this infflication that was cooling off quicker. And where the fatales rate is currently even after that first cut, there's a there's a pretty big difference now in real terms, and they feel, and probably rightfully so, that that's real rate. The respective rate is still pressing a lot on the economy, even though we're seeing some subtraction coming through, right, you know, the last number of weeks, and there's a forward looking data and so I think they build us this building and think insurance against their own forecasters in they put the four point four percent on the poor rate out there because that's what they think that the rate will be. But yet they're willing to cut faster in order to not have that forecast material lines and they based upon that announceers. But because carried us comparing the funds rate to the expected inflation and trying adjust according to and on that basis, yes, you could cut a little faster. It maybe means that that is a nure and fifty base points in court Coate short order.

We had a number of FED speakers today, including Austin Goulsby, and he was saying that current policy rate and FED funds is hundreds of basis points above neutral. Brian and I were talking yesterday with a guest, I mean, I know the neutral rate is largely theoretical. It can't be measured, it's only estimated. We get that. Does it benefit the conversation around monetary policy to talk about a neutral rate and do you have a sense of where that may be?

Yeah, it does benefit up because you know, ultimately the neutral rate is really were the Fed points to get at where you know they essentially have achieved the mandate completely, meaning Maggie, we have a soft lending now to get to that man. But ultimately it's about price stability and maximum employment. Right, So it may be at three three and a half percent. I think the pandemic and the rate is shock played out and all the stimulus and then subsequent investment is taking place in near the stage, you know, with the productivity that has come along with that that I think the economy is at a higher trend growth currently than it was pre pandemic, and that is the reflection of the cowed neutral rate. So the FAEDA spencials then close to three percent, the market is pricing something like three in the quarter three and a half percent. We'll probably get some sort of facility in there. If the fat cust rates further from here, as in we're trying to get to some sort of neutral rate, then we have to assess it that is truly neutral, right, But that's what the market things currently and the Fed's are too far away. Yeah, probably a good guide boasts full for overheading with multi policy in the near two.

So there's the economy and what it's doing, and then there's the market. We've got the S and P five hundred, up just under twenty percent year to date. It gained more than twenty percent last year, so two twenty percent years. It's not unheard of, but it would naturally make some people nervous, unless, of course, you consider that the year before that, twenty twenty two, we were down more than twenty five percent. So if you put these three years together, you're up about eighteen percent over three years, and that's below the average return on the S and P. So I'm confused. Are we fully valued here or is there more room to run?

Yeah, and it's amazing. It's a pretty complicated question because Brian, because you know, on one hand, you can basis upon the interest rate forecast, right, if we're going to go low with interest rates, the mechanics are that, you know, stock prices are going to go higher, right most most of the time, you know, especially if you're in an environment where the economy is actually doing fairly okay, and all that lower interestrates do is just giving the economy more of a push, right, So that should be reflected into the mark it and that's sort of what happening. On that basis we're not fully valued. We could actually expand in the multiple by just simply higher price stock prices. But if you think of like if we're still an economy where there's risk of inflation, or risk of ejudging the sharks, or risk of what we saw this summer, right of a sudden unmind of leverage in the system. You know, you are at a loftier level, so to speak, and so it is vulnerable to the subsequent volatility that could emerge, whether as will be the election. Not so sure. It doesn't seem to be that the market supported by the election. More again, something about unexpected coming through the data or others sign judging the sharks, or about what may take note that we do have some disruptions going on in the supply chain. Again, you know, that may be something that Marcus is paying attention to as one one factor. So I think to somewhere up with the market may look overvalued, but there's more room in the price, especially if you think about interests, you know, declining in the future.

You know, our colleagues has spoke with the noted strategist ed Yardenny earlier in the day. Maybe you had a chance to see this on the Bloomberg terminal, and he said that the basically, the decision that we had last week to go fifty basis points has lifted the odds of an outright melt up inequities, and he likened it to what we saw on the dot com bubble. I mean that that sounds a little concerning to me. Is does he have a point?

Yeah, he does, because the melt up obviously is the issue, right, is that that's the sort of getting really a sprint to the finish here. That we've been on a pretty good run here for the last couple of years and a lot of charts out that the bullmarkt young and it could have a lot more to go. But what he's talking about is more like you get to sprint at the end. And look, let's face it, we do have an AI boom, so to speak, and there's a lot of data out on it at much to spend on it and maybe now being invested again. But there's some form of fraud there that we can't deny that and so that's where we have to work. That's what Jors talking about. Did you get amount of ben the frost of the AI, you know, spending may may be ons.

He also warned that central bankers should be careful here with aggressive rate GUIDs because he thought inflation could resurface, and he highlighted that both candidates and the presidential election are proposing policies that could trigger inflation. So an interesting look there from Ed Yardnny and an interesting look from Ben Emmons joining us from FED Watch Advisories.

Bloomberg Opinion Informed Perspectives, an expert data driven commentary on breaking.

News time for Bloomberg Opinion. And we are joined now by opinion columnist Minchin Pei, who is writing about China's economic recovery. He's saying the game isn't over for China, but it's garbage time. Mention joins us from southern California. Always a pleasure and the timing is absolutely perfect. As we speak here, minshe in PBOC Governor Penggonsen as a conducting a news conference with two other officials, and they are outlining what is clearly just a massive program from the Central Bank to stimulate the Chinese economy. I want you to weigh in, what do you feel about this?

Well, certainly they try to end the so called garbage time. The sentiments in China are really bad. I'm no economist, but based on what I have read, the real problem for China is not monetary policy, is actually low demand, consumer demand in particular. So this policy lower interest rate and doing other things probably is good, but not going to make a big difference. That is not a bazunka. One of your colleagues said it was a bazuka. I think that's a pistol rather than in the bluka. Because China right now is in a liquidity trap.

The money there's.

Just massive build above debt, so the money you pump into the system is just used to pay off debt rather than to buy stuff.

Or do stuff.

Yeah, for people who haven't read the piece, I can just summarize it quickly in saying that the collapse of the real estate sector has really been a big part of this problem for the average person in China. It's shrunk their wealth considerably and it's hurt their consumption. But what's interesting is you say that the malaise goes a lot deeper and has political roots to it, that they just don't have as much confidence now in President Shijen Ping as they did maybe when we saw other ructions, like in the late nineties, because at that time they had a lot of confidence in the then premier at Jerome g tell us a little bit more about these political issues.

That you see.

Oh yes, I think there are really two issues for the average people. They think they've given the government enough time to show that it has a better game plan. They have not seen one because the economy is just stuck in neutral for now for the better part of eighteen months. So that is.

So the government.

Actually has to do something that changes the perception and sentiments. The other is that they doubt whether sheating pain will change costs. He might do some technical adjustment, but there is no end in sight of the end of his tenure. He effectively has made himself a lifetime ruler. So people say, well, in the past, at least a leader will be there for ten years and then we have a chance for real change. But no such possibility exists at a moment.

So there's no way for the party to put pressure on him to change course.

Here, no way, no way, Because now China essentially has centralized personalized leadership at the top. Most of the top people are chooging things friends or allies, So how are they going to put pressure on that patriot?

You know, it's interesting though with people in China, I think, like Americans, they tend to be opportunistic and confident about the future, and they put a lot of faith in education and Chinese culture, and that's something that sort of supersedes to a certain degree political leadership in China. Is there a way that you can see kind of an organic reflowering of optimism and if so, what might lead to that?

I think it would take a while, because China is now caught in this cycle, the their cycle, the lealistic cycle. Probably five six years from now, we don't know how long it will take, but I think if the economy recovers on its own organically, then the sentiments will change. The other is that, as I said, the government really needs to a lot, But the problem is that the government does not have a lot of dry powder that can be used.

So if you had to speculate a little bit on what the reaction of the population in China might be, if we have considerably more weakness, no recovery in the property market, persistent deflation in the economy, and just overall weak sentiment, I mean, isn't that a way for the government to begin to kind of maybe second guess itself and change course, or do you think they would be unmoved The leadership would be unmoved under those circumstances.

I think the leadership will have to react if, for example, we're have much higher levels of unemployment right now, the latest number on use unemployment is about nineteen percent. That is very high. And if because low consumer sentiment can create a self in reinforcing feedback loop, less income, more insecurity, less spending, so the economy will simply get worse and worse. So I think if the government does not do anything, this is what we can predict, we can count on happening. I think a critical thing is what happens on November sixth, of six years, the US election, because the government is saving what little fiscal power that it has in the case Trump gets re elected and flaps huge terrors on China, and then China will use its fiscal resources to stimulate the economy.

For that, the.

Government wants to just wait. They don't have much longer to wit. So I guess we can see some action at the end of the year.

Well, we had some action today and we can talk more about that momentarily. Mentioned it's always a pleasure Mention pay Bloomberg opinion columnists joining us here on Daybreak as.

This is the Bloomberg Daybreak Asia podcast, bringing you the stories making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always on Bloomberg Radio, the Bloomberg Terminal, and The Bloomberg Business Out

Bloomberg Daybreak: Asia Edition

Join Bloomberg Daybreak Asia for business and finance news centered in the Asia-Pacific region, alon 
Social links
Follow podcast
Recent clips
Browse 1,524 clip(s)