Explainer: How Xi Jinping’s top economic advisor thinks about fiscal stimulus

Just how bad is China’s economy?

That’s the question investors and Chinese policymakers are asking themselves – as the former wait for a fiscal support package being designed by the latter.

But as we put it in our monthly macro wrap on the Q3 GDP data, published earlier this week:

• A cynic might point to consumption’s record-low contribution to GDP growth as evidence that the speed – and quality – of economic expansion has never been weaker.
• An optimist, meanwhile, could highlight the growth in big-ticket item sales and the steady momentum in industrial activity to argue that economic fundamentals are strong.
• In reality, China’s economy is somewhere in between these two viewpoints.
• Policymakers will underscore the reduced role of the property sector, the concurrent rise in high-value manufacturing, and the reduction – albeit slowly – of local government debt risks as evidence that its structural transformation is taking shape.
• But the missing ingredient is household consumption.

So while concerns about the economy have only intensified, it’s not clear to us that China is on an inexorable downward trajectory, especially if policymakers deliver on the highly anticipated fiscal support package in the next few weeks.

Within that muddled context, we found a recent piece by Xi Jinping’s top economic policy advisor to be particularly instructive.

• We rate Liu Yuanchun – President of the Shanghai University of Finance and Economics – as the most influential economic policy voice outside the government.
• So we took note when he published an essay detailing the rationale behind Beijing’s emerging policy moves.

Liu argues that the policy package Beijing is rolling out – albeit in a piecemeal fashion – is not meant to serve as a traditional short-term stimulus.

• Rather, it’s meant to tackle some of the most pressing near-term challenges that have arisen from China’s deep-rooted economic deficiencies, while laying the groundwork for an improved economic structure over time.

Specifically, Liu highlights the following near-term challenges:

• The real estate market decline hasn’t “narrowed sufficiently.”
• Local governments are bleeding cash and spending ineffectively.
• Household confidence – and therefore consumption – is in the dumps.
• A wide range of listed Chinese companies are trading at prices below the net value of their assets.

Our take: Liu has pretty much nailed the challenges – we’d make virtually the same list.

So what’s the path forward? Liu argues that the already announced – and upcoming – policy moves are meant to achieve the following.

First, Liu says that “stabilizing the real estate industry and the capital market has become an important prerequisite for expanding domestic demand.”

• In other words, people aren’t going to pull out their smartphones and buy stuff when the two main areas of wealth creation in China – property and equities – are in the dumps.
• Enter the central bank (PBoC), with its efforts to boost corporate share buybacks; the housing ministry (MoHURD), accelerating urban slum redevelopment; and the finance ministry (MoF), allowing local governments to once again use special-purpose bonds to buy idle land.

Thus, in Liu’s view, the PBoC’s recent moves to support the A-share market aren’t simply about running up equity prices.

• Instead, the fact that 800 of China’s 5,300 listed companies are priced below net assets per share – meaning they’re valued at less than the sum of their parts – indicates that “China’s capital market pricing is seeing a systemic distortion.”
• Thus, the PBoC’s facilities to underwrite share “repurchase and refinancing…will play a fundamental role in [improving] the functioning of the capital market and a return to rational investor behavior.”

Second, Liu argues that authorities are undertaking a major transformation of the fiscal and monetary policy frameworks.

• He says the key here is that recent moves “have set the precedent for the central bank to purchase assets through indirect channels.”
• What’s more, Liu says, the establishment of the MoF and PBoC’s “joint working group on treasury bond trading…is a major adjustment to the country’s future positioning in fiscal policy and monetary policy.”
• This, he argues, will better align fiscal and monetary policies – making them more potent.

Liu stresses, though, that the recently announced and upcoming policy actions are only partly aimed at quickly shoring up key economic weaknesses.

• What most analysts are failing to appreciate is the structural approach, meant to bring about “fundamental changes in behavior patterns and incentive systems” throughout the economy.

So in Liu’s telling, all of the recent moves are a precursor to addressing a more fundamental challenge – that of boosting confidence and ultimately expanding domestic demand by increasing consumption.

The upshot: To us, it’s clear from Liu’s explanation that the central government will announce yet more, and sizable, fiscal support soon.

• But most importantly, that fiscal support won’t be a one-off.
• Instead, it will be the beginning of a sustained, “incremental” policy support package – aimed at building the foundations for a long-term shift in China’s economic structure – that will unfold over the next several years.

There was a lot more news out of China this week – on the political, commercial, technological, and economic fronts.

• We highlight everything you need to know below. 

-Andrew Polk, Co-founder, Trivium China

What you missed

Politics

Hot off the heels of his recent inspection tour of Fujian province, Xi Jinping ventured over to Anhui province last Thursday and Friday – where sci-tech innovation was front and center.

• Xi told officials and businesses that innovation is the key to national strength, saying:
• “To advance Chinese-style modernization, science and technology must lead the way, and technological innovation is the only path forward.”
• He urged local officials to support both established and emerging tech companies.

Xi also inspected a brigade of the PLA Rocket Force (PLARF) in Anhui on October 17.

• The PLARF has been at the center of a series of high-level corruption cases over the past 18 months; its two top officers were purged in 2023.
• Xi was in town to make sure the group cleans up its act.

Tech

On Saturday, the State Council released its Dual-use Item Export Control Regulations. 

• The Ministry of Commerce (MofCom) will be responsible for enforcing the new regulations, which will take effect December 1.
• The regulation takes inspiration from Washington’s long-arm jurisdiction.
• It empowers MofCom to take action against foreign entities that supply products containing Chinese-origin dual-use items to third parties.

On Thursday, China’s market regulator (SAMR) announced a new pilot program to share data on market behavior with platform companies.

• Under the pilot, SAMR will allow three to five selected platform companies to utilize the agency’s data on illegal or non-compliant market behavior by merchants.
• Platforms will presumably use that data to identify on-platform merchants at risk of cheating or defrauding consumers.

Corporates

On Friday, China Resources Recycling Group (CRRG) – the newest central state-owned enterprise (SOE) – was officially established.

• Supporting heavy industrial enterprises in recouping value from retiring outdated equipment is a top priority for CRRG.
• An early measure of success would be if its establishment triggers a new round of industrial upgrading.

Econ and finance

On October 11, 21st Century Biz reported that certain local government financing vehicles (LGFVs) have been ordered to repay debts borrowed on behalf of local authorities by June 2027.

• The instructions – which haven’t been publicly released – were issued by the finance ministry and four other agencies in August.

China’s soy and sorghum imports have spiked as traders scramble to stock up before the US presidential election.

• Chinese buyers are concerned a second Trump presidency could spark another trade war, dialing up tariffs, so they are paying a premium for US cargoes that arrive before the inauguration, and shunning shipments that arrive later.

Foreign affairs

On Tuesday, Xi Jinping met with Russian President Vladimir Putin on the sidelines of the 16th BRICS Summit in Kazan, Russia, saying:

• “The deep friendship between China and Russia for generations will not change.”
• Get smart: China’s deepening relationship with Russia is happening because of Western pressure, not despite it.

On Friday, top diplomat Wang Yi met with British Foreign Secretary David Lammy in Beijing.

• China-UK relations have deteriorated in recent years, driven by Beijing’s restrictions on civil liberties in Hong Kong and its position on the war in Ukraine, and London’s moves to limit Chinese participation in domestic infrastructure projects, among other factors.
• But a newly elected Labour government in London provides an opportunity for both sides to recalibrate the relationship.

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.