China’s stock market rescue last week provided the latest evidence that the 2024 rally sparked by the Communist Party’s “whatever-it-takes” pivot had run out of steam. It needs another artificial jolt. Big boosts from Beijing have in the past stimulated the entire global economy — most notably in the wake of the Global Financial Crisis in 2008. But it would be unwise to count on help from that quarter this year. Buying by the so-called national team of state-controlled investors instantly put a floor under a dismal run for Chinese equities, particularly technology stocks. Policymakers’ intention is clear — boosting technology’s competitiveness so that it can rival the US and drive growth that shores up living standards. Yet, as in 2024, the durability of this intervention remains uncertain. Weakness in consumer demand is undermining growth, even as exports — which stepped in after the collapse of the property market — continue to surge. Does another Beijing policy shift lie ahead? If the chief concern is exports, then probably not: But exports alone can’t drag the economy along. The recent slowdown in fiscal spending points to an economy that’s barely staying afloat. Data published last week by the Finance Ministry shows fiscal spending declining by 12% year-on-year across the general and funds budgets: This doesn’t necessarily mean that another big stimulus would help. Leah Fahy of Capital Economics suggests that the shortfall may be due to local governments failing to use all their allocated funds; ministry data shows they used up 47% of their special bond quota in the first half of this year, compared to 49% in the first half of 2025. Fahy argues that fiscal spending was front-loaded last year, so base effects will turn favorable. But if local governments’ borrowing continues to be absorbed by restructuring old debts, the fiscal impulse may prove to be even smaller than the figures in this year’s budget implied. A slowdown in growth adds to the case for a fiscal stimulus. The official position blames “short-term factors and external influences,” particularly in the energy sector. The bottom line is that second-quarter 4.3% real growth in gross domestic product was the slowest pace since late 2022, when Covid-Zero restrictions were still in effect: BCA Research’s Jing Sima projects that fiscal policy will turn somewhat more supportive as the year progresses, but on a limited scale. Beijing will accelerate existing measures to shore up domestic demand, with support tilted toward strategic sectors: Although policy support will increase in the second half, the primary driver will be faster implementation of already-authorized fiscal measures rather than broad-based new stimulus.
Consumption remains fairly weak, but Gavekal Research’s Andrew Batson points out that it’s far from the extremes of two years ago — and that the authorities might now be prepared to accept lower growth: Real growth in domestic demand — consumption plus investment — is still in the same 3-4% range it has been in since 2024. Arguably, that is not ideal, and the government should do more, but the authorities have tolerated subpar domestic demand for some time already.
Volatility in oil and gold prices complicates inflation, but Batson notes that the underlying trend is for very low inflation around 0.5%, not outright deflation: Overall, local governments’ financial problems remain unresolved. The 2024 debt-swap program stabilized the situation, and it’s possible that the central government has quietly expanded the scale of the bailout as needed, Batson argues. A meaningful fiscal stimulus package remains an option. But it appears far less urgent than many investors had hoped. —Richard Abbey | 
Comments
Post a Comment