China’s ‘whatever it takes’ moment? Investors hope for billions in new stimulus

Investors are on tenterhooks as Beijing prepares to deliver fresh policies over the weekend that could jumpstart its economy.

China’s Finance Minister Lan Fo’an is set to hold a press conference at 10 a.m. on Saturday local time on “intensifying” fiscal stimulus policies, the country’s State Council Information Office said.

With Beijing at risk of missing its full year economic growth target of 5%, some analysts are confident that authorities are ready to deliver major fiscal stimulus at the highly anticipated event, while others remain skeptical.

Investors had expected a fresh package to be announced during the National Development and Reform Commission’s press conference on Tuesday, which was held shortly after markets reopened following a weeklong holiday.

During that event, the chair of NDRC pledged a raft of actions to bolster the economy. But Zheng Shanjie stopped short of announcing any new major stimulus plans.

The move underwhelmed investors and sent a lengthy rally in the mainland Chinese markets into days of volatility.

With this second shot, the Chinese government has now realized that it’s facing a “whatever it takes moment” and it will do “whatever that is necessary to stop the bleeding of the economy, and to get things moving,” Chen Zhao, chief global strategist at Alpine Macro, told CNBC’s “Squawk Box Asia.”

Authorities are likely to affirm that at the press conference on Saturday, Zhao said.

Before the Golden Week holiday, Chinese officials unveiled a flurry of stimulus policies, including interest rate cuts, lower cash reserve requirements at banks, looser property purchase rules and liquidity support for stock markets.

Many investors and analysts viewed the move as a signal that Beijing was finally ready to take drastic action to revive its ailing economy, following a barrage of disappointing data and amid a slump in consumer confidence. At the time, Chinese major indexes began to rally, surging over 25% as investors cheered on the slate of stimulus measures.

Most economists expect some sort of additional stimulus, but there are many differing views on its size as well as the priorities of the package. Some have floated a figure between two and three trillion yuan (the equivalent of $282.8 billion to $424.2 billion), while others have suggested 10 trillion yuan ($1.4 trillion).

Speaking to “Street Signs Asia,” Chetan Ahya, chief Asia economist at Morgan Stanley, said the package will likely be focused on stimulating domestic demand, supporting recapitalization of banks, as well as local government debt restructuring.

The consumer stimulus measures could be targeted at social welfare spending, with an aim to free up more household savings, he said. And a small portion of the package could be dedicated to support consumer trade-in programs.

In a note, economists at Morgan Stanley predicted that China’s Ministry of Finance will deliver a modest supplementary fiscal package at the press conference — which they called “Beijing’s second change to convince the market” after it undershoot earlier this week. However, the economists conceded that expectations are high.

“Higher size with clear consumption stimulus portion, or clear forward guidance for next year’s expansionary policy, would constitute a positive surprise,” the Morgan Stanley economists wrote.

Forward guidance on 2025 is critical and we expect another two to three trillion yuan widening in the augmented deficit but don’t think the size will be announced before end of 2024, they added.

Beijing needs to announce 10 trillion yuan fiscal stimulus that’s focused on boosting consumption and removing large inventory in the property market, Morgan Stanley’s Ahya said.

“That’s not what we are saying they will do” but they need something like that “to get the economy out of deflation and ultimately create a sustained turn around in investors’ confidence,” he continued.

Beijing could be wary that an enormous stimulus package may send a signal to the public that there are more severe underlying economic problems, so they could phase them out into piecemeal announcements, Ahya added.  

This time round, Ting Lu, chief economist at Nomura, expects the finance ministry will announce a package no larger than 3% of China’s GDP, which grew 5.2% to 126 trillion yuan in 2023. 

The ministry may discuss additional funding through the issuance of government bonds, but the exact numbers could come later this month at the National People’s Congress’ standing committee meeting, Lu said. The NPC standing committee is China’s top legislature.

Reuters reported in late September that China had plans to issue special sovereign bonds worth about 2 trillion yuan ($284.42 billion) this year, with 1 trillion yuan primarily to revive domestic consumption and the other half to support local governments’ debt problems. 

A two trillion yuan bond issuance is unlikely to turn the economy around, said Alpine Macro’s Zhao, who believes that the next stimulus package needs to be around 4-5% of GDP to reverse lackluster consumption demand. 

“The Chinese government is already backed to the corner, they are panicking. These are good things from the stock market’s point of view,” he said, insisting that the finance ministry will unveil a package on Saturday that could be “sufficient enough to make a bottom for the economy.” 

But, a Chinese political veteran has cautioned that changes in fiscal policy needs to go through lengthy legal processes for approval, dampening Zhao’s hopes for this weekend.

Dong Yu, a former official on China’s top economic planning committee who now serves as vice president of China Institute for Development Planning at Tsinghua University, told local media in an article published Thursday that a fiscal stimulus package worth trillions of yuan will eventually come, but people need to “practice some patience.”