Does Beijing want a recovery in equities?

China’s President Xi Jinping is wedded to his idea of high-quality growth. Increasing national security and onshoring more industrial and technological capacity is what matters to him most.

| 6 min read

China’s president Xi Jinping has let the Chinese stock market recover a bit. After all, the Shanghai Composite index has taken a pounding since a peak at more than 5,000 in June 2015 and its all-time high in 2007. In 2024, the index is up by 2%, recovering by more than 10% from its February low. Now around 3,000 it is back trading at levels that have been common in recent years.

The current Chinese government is keener on stability than on speculative frenzies. It does not see foreign shareholders as an important group they wish to woo. Investment in China over the last quarter of a century has not been very rewarding anyway, despite all the growth the economy has achieved.

This week sees the meetings of the National People’s Consultative Conference and of the National People’s Congress. The congress is China’s legislature and senior state body, which elects the President, and is formed of 3,000 delegates from around China. At this event, Chinese Premier Li Qiang will present his annual Work Report, which will include a review of the economy and proposals for the year ahead.

Changes of economic policy are usually signalled and rubber stamped at a meeting of the Plenum. President Xi has not scheduled a Plenum meeting, implying indecision about major economic policy changes. It is certainly evidence that President Xi has consolidated power and feels free to change the pattern of meetings as he wishes. There is alleged to be an internal debate about how much stimulus to offer and how big a role the private sector can play in growth.

Slow and steady

China watchers expect more small steps to reflate, without major policy moves. The central bank has been cutting interest rates, allowing banks to lend more and loosening conditions a bit. Money growth is meant to be kept to the growth rate of nominal gross domestic product (GDP) but, with inflation now low, the 8.7% growth in broad money and the 10% growth in loans is outrunning GDP a little. Narrow money remains tighter. The central bank is nervous about undue devaluation of the yuan and notes the relatively high rates of interest on the dollar. Over the last year the yuan has been around 7 yuan to the dollar, weaker than the previous few years. We should expect more small steps on interest rates, reserve ratios and money market management.

China watchers expect a modest fiscal stimulus. They may keep the official deficit at around 3% to 3.5% of GDP, down a little on the 3.8% announced last year. There could be additional off balance sheet state borrowings. Maybe 1 trillion yuan of additional central borrowing and 4.0 trillion of local authority borrowing will be added.

Local government remains stretched but has been the preferred way of injecting more money in through investment. Discussions are underway about how to refinance or walk away from some of the off-balance-sheet borrowings local government agreed as part of the property development boom. Many areas have overextended their credit, with interest charges taking a high proportion of tax revenues. The government is adamant it does not want a further property boom and is factoring in a substantial contraction in the over-bloated property sector.

Gradually nationalised concerns will take over residential assets and secure the build out of the remaining projects. The state will look for ways to build more affordable and rented accommodation for less-well-off Chinese.

As a Chinese socialist he sees the state as the main means of implementing his vision.

President Xi is wedded to his idea of high-quality growth. Increasing national security and onshoring more industrial and technological capacity is what matters most, as he prepares to be more independent of the US. He is looking for ways to increase Chinese investment in artificial intelligence, digital activity, quantum computing, biotechnology, aviation engineering, drones and green products. He understands the old model based on exports to the West, heavy investment in infrastructure, and allowing more private-sector development is no longer the right one for his global political ambitions.

As the head of a powerful bloc of world countries appealing to the south and emerging-market countries, he needs a China bursting with technology and with a strong military. As a Chinese socialist he sees the state as the main means of implementing his vision, and the dominance of the Communist Party as fundamental to good order. It is likely the premier will go for another year, in which there are forecasts of growth of around 4.5% to 5%. With property still falling – and inflation low – Beijing will struggle to achieve this, and further growth packages will be required.

China is very well placed to exploit the advanced countries wish to transition to ‘net-zero’ emissions, with a wide range of the crucial products and raw materials for electric cars, battery storage, wind turbines and solar panels under its control. Both the US and the European Union (EU) are investigating whether they should open their markets fully to these Chinese imports when they wanted to try to capture some of the green jobs for themselves.

Now electric cars come with so much digital technology< US President Joe Biden is asking if they come as ready-made Chinese spies collecting data. Chinese policy is centrally driven and will depend on more support and direction from the state as they tackle the excesses in property and local government.

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Does Beijing want a recovery in equities?

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