China Stimulus Is More Than Just One ‘Damn Number’

Ironically, China’s President Xi Jinping has been cornered into the same uncomfortable spot reserved for high-profile chief executives like JPMorgan Chase & Co.’s Jamie Dimon: Impatient stock investors are brushing aside the intricacies of running complex businesses and demanding simplistic numbers to justify their euphoria. 
Last week, as JPMorgan’s share price was hovering near a record high, Dimon called out analysts’ obsession with the bank’s future net interest income. It was just one “damn number” that can change drastically depending on the US economy and the shape of the yield curve. “We spend too much time on just this irrelevancy, so you get a model — number in your model,” he said. 
Xi is not as outspoken, but his administration must be feeling the same exasperation. Since Beijing announced a slew of unusual policy changes in late September, spurring a sharp stock market rally, many have been looking for magic numbers at minister-level press conferences. 
A 10 trillion yuan fiscal stimulus is needed to continue the market rally, traders have said. The lack of big numerical disclosures from the briefings held by the likes of the Ministry of Finance were thus seen as a disappointment and created sharp swings in Chinese equities.
We shouldn’t have expected Santa in the first place. Back in 2008, a 4 trillion yuan package was announced by Premier Wen Jiabao at a State Council Executive Committee meeting. The same protocol should be applied this time around. 
It’s clear by now that debt restructuring is a central part of this stimulus program. It has three major aspects: debt swaps to alleviate local governments’ financial burden, the state buying unsold housing to stabilize property prices, as well as capitalizing big banks so they are willing to lend to distressed developers struggling to deliver pre-sold homes. All the puzzle pieces need to fit before there can be a successful turnaround.
For instance, the Ministry of Finance has promised the largest one-time debt swap in recent years to improve local governments’ finances. Fiscal austerity is seen as a major culprit behind this year’s economic slowdown. With dwindling land sales, municipalities have been imposing exorbitant fines on businesses and have fallen behind on fiscal spending. That the central government is now offering a helping hand is a major policy pivot from previous years when Beijing insisted that local governments resolve their own debt issues. 
How much help Beijing should offer is a complicated matter. First of all, the government needs to do a rough audit to get a sense how much potential hidden local debt there is — the International Monetary Fund estimates that off-balance-sheet local government financing vehicles had about 60 trillion yuan in liabilities as of 2023 — as well as the proportion it’s willing to recognize as on-budget borrowings. Of course, the central government won’t be picking up the entire bill, or it’s at risk of creating moral hazard down the road. The Ministry of Finance will then need to sit down with provincial governments and decide on the size of the bailout. This process takes time. 
Nonetheless, the government has shown a willingness to bend its rules and work on various aspects of debt restructuring. In the past, long-term special sovereign bonds were rare and used for national strategic purposes, such as recapitalizing big state-owned banks in 1998, or seeding the country’s sovereign wealth fund in 2007. The new issue may be used for a municipal debt swap. Meanwhile, local government special-purpose bonds, traditionally used for infrastructure spending, could be directed toward home purchases. 
As all distressed debt specialists know, patience goes hand in hand with restructuring. So far, equity traders are obsessed with the total scale of new government bond issues, seeing the number as a simple proxy of the fiscal stimulus. But what they really need to figure out is how officials plan to use the money and how the math really works. If this is too much, perhaps they should not invest in China at all. 
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Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.
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