China inches towards stimulus as the economy slows
WHEN Wang Xianchen, a Chinese official in the early 1500s, tired of the scheming of imperial politics, he returned to his home in the southern city of Suzhou for a simpler life. He planted gnarled trees and built up rocky islets, creating what he called the “Humble Administrator’s Garden”, a fine place for tranquil contemplation. His garden remains stunning. But its tranquillity is long gone. During the first week of October, China’s National Day holiday, some 30,000 people walked over its stone arch bridges every day, with queues to get in stretching around the block. They were among the 726m visitors to domestic tourist sites during the week, a record and a rise of 9% on last year’s figure. China’s present-day administrators, less humble, touted this as proof of the economy’s resilience despite a growing catalogue of concerns.
The backdrop certainly looks ominous. The trade war with America is heating up. In a speech on October 4th, Mike Pence, the vice-president, accused China of economic aggression and vowed that America would “not stand down”. Its tariffs are just starting to bite: the biggest round so far, covering $ 200bn-worth of Chinese imports, came into effect in September and will be ratcheted up at the start of 2019. The troubles for China could easily spread. The Trump administration has indicated that it wants to stop other big economies, including Japan and the European Union, from negotiating trade deals with China.
Domestically, confidence has taken a battering. The CSI 300 index, a gauge of the biggest Chinese equities, is down by 29% since January, putting it among the world’s worst-performing markets this year. Efforts to stabilise debt levels and to crack down on shadow banking have drained liquidity from stocks. Many local investors are also nervous about the direction of Chinese politics. President Xi Jinping’s recent pledge to make state-owned companies “stronger, better and bigger” reinforced the impression that the government is turning against entrepreneurs.
The yuan is also under pressure. It is down by nearly 10% against the dollar since the start of February. Even if that echoes other emerging-market currencies, it risks adding fuel to the trade war. Steven Mnuchin, America’s treasury secretary, warned China against competitive devaluations in an interview with the Financial Times on October 10th. China has in fact been trying to slow the yuan’s slide, worried that weakness might spur capital outflows. A currency trader with a major foreign bank in Shanghai says that a regulator scolded his team last month for not doing more to support the yuan. As is common when sentiment is fragile in China, propaganda authorities have ordered local media to make their reporting about the economy more positive. Hence the extensive coverage of the strong tourism figures during the National Day holiday.
The government is betraying some jitters itself. China is now the only major economy that is shifting to looser monetary policy. On October 7th it reduced the amount of money that banks are required to hold in reserve, the fourth such cut this year. That freed up about 750bn yuan ($ 108bn) for extra lending. The central bank has yet to lower benchmark interest rates, but it has guided bond yields down by about a percentage point since January (see chart).
Fiscal policy is also set to provide more of a boost. On October 8th the State Council, or cabinet, announced that it would give exporters bigger tax rebates and also called on municipal officials to accelerate their investment plans, an important signal in China’s governance system.
If officials thought that these various steps would change the tide of investors’ opinion, they were mistaken. Stocks dropped sharply when trading resumed after the holiday. The exchange rate slid towards 7 yuan per dollar, a level it has not breached in more than a decade. Partly, these moves reflected China’s catch-up with global markets after its week off. But they also pointed to a deeper truth about the policy easing: that it has been tentative.
Having made some progress cleaning up the financial system, the government does not want to erase its gains. “We must avoid flooding the economy with a strong stimulus,” Premier Li Keqiang said at a recent cabinet meeting. In real terms, bond yields are a percentage point higher than in late 2016, when the government was focused on revving up growth. A campaign to close loopholes in tax collection has hit small firms especially hard. At the same time officials have continued to limit borrowing by the most indebted companies.
The restraint makes sense. China’s economy might be slowing but the situation is far from dire. A big stimulus when growth is still running at about 6.5% year on year would be an alarming over-reaction. And it is easy to exaggerate the gloom. Some noted that the 9% rise in visitor numbers over the National Day holiday marked the first time in a decade that domestic tourism had increased at less than a double-digit rate. Yet popular destinations can scarcely handle much more. At the Humble Administrator’s Garden it was impossible to take pictures without dozens of other people in them. A few daring visitors seeking the illusion of solitude instead climbed onto the grey-tiled roofs of its covered walkways.
This article appeared in the Finance and economics section of the print edition under the headline “Feeling humbled”
