China’s Cabinet Boosts Stimulus Firepower as Recovery Looks Legit

There’s been another strong move higher for Chinese stocks today, on the back of comments made out of a meeting of China’s cabinet, the Politburo, that suggest the central government will lend direct fiscal support.

I advised on Tuesday that investors should wait and watch before buying into the notion that this rally is for real. But with Shanghai and Shenzhen on track to post their best week in almost a decade, there’s further evidence that the China rebound has finally arrived.

There is a long way for them to come back. These markets were the world’s worst performers last year, and have disappointed for the better part of four years now. Since the first rally when it appeared the end of the pandemic was in sight, China bulls have had their dreams shattered. The same applies to recent college graduates inside China, anyone who bought into the entrepreneurial “China dream,” and the private sector as a whole.

What’s the reason for today’s gains? Chinese President Xi Jinping on Thursday chaired a meeting of the Politburo that, finally, admitted to “new situations and problems” facing the economy. The cabinet committed to adjust fiscal and monetary policy as necessary, and to spend enough to ensure China hits its government growth target of “around 5.0%” for this year.

Beijing has so far resisted dramatic fiscal stimulus, so today’s admission is a sign that greater support for the economy and the stock market is on the way.

The cabinet encourages making the “necessary fiscal expenditures” to drive growth, as well as to “promote the real estate market to stop falling and stabilize.” The party should “respond to the concerns of the people,” demonstrating “urgency” to address livelihood and private-sector concerns. All this, at a meeting that’s not normally a time to promote new economic policy.

Beijing has so far resisted dramatic fiscal stimulus, so today’s admission is a sign that greater support for the economy and the stock market is on the way.

A caveat: what form that stimulus will take is unclear. Reuters reports that China will issue the equivalent of $285 billion in special sovereign bonds this year as a means of injecting fresh stimulus. Bloomberg, meanwhile, says the support already flagged to be heading in the direction of China’s “Big Six” state-owned banks will amount to $143 billion in capital, partly supported via those sovereign bonds.

Beijing did say on Wednesday that it will grant one-off cash handouts to people in extreme poverty, without providing further detail on how much and to how many, as well as improved benefits for some unemployed citizens; the city of Shanghai, the largest in China, has chipped in to say it will issue the equivalent of $74 million in consumption vouchers, to encourage spending on dining, hotels and movies.

The moves are designed as a feel-good frisson while China prepares for the “Golden Week” holidays around China’s national day on Oct. 1. Many people will have next week off. While the mainland markets in Shanghai and Shenzhen are due to trade this coming Monday, they will then be shuttered through Monday, Oct. 7, resuming Tuesday, Oct. 8. Hong Kong will be trading all but Oct. 1 itself.

Consumer and property stocks have been the big gainers today. Developer Longfor Group LGFRY (HK:0960) led the Hang Seng with a 28.3% leap, followed by rival China Resources Land CRBJY (HK:1109) with a 21.5 ascent, and then the hot-pot restaurant chain Haidilao HDALF (HK:6862), up 18.0%.

Other consumer companies such as China Resources Beer CRHKY (HK:0291), up 15.7%, and the sportswear groups Li Ning LNNGY (HK:2331), up 15.0%, and Anta Sports ANPDY (HK:2020), up 14.0%, also enjoyed extremely strong days.

For once, it was China’s most-troubled sectors, those hurt by the tailspin in property prices and the lack of consumer confidence, that led the way On the Hang Seng Tech Index, the video-streaming site Bilibili BILI (HK:9626) was the top gainer, up 11.5%.

Dark clouds remain in the background. President Xi does not trust private industry, has concentrated power in the central government, and augmented his own control, all the while pushing Marxist doctrines ultimately designed to redistribute wealth. He envisions a nation where the Chinese Communist Party is the ultimate authority on, well, everything; second in importance comes the vast network of state-owned enterprises that are, even when listed on exchanges, under government control; and third and definitely last, private, for-profit business.

Xi views companies as a grubby necessity that must also be required to engage in philanthropic efforts entirely beyond their scope of expertise. Running China’s largest e-commerce site? How about you start a school, then? Oh, you’ve got a super app, China’s largest streaming service and a raft of successful video games? Obviously, you should set up a network to provide hearing tests to senior citizens in rural areas, and run a scheme to take underprivileged children to museums.

It is a dangerous business to criticize Xi, who has tanked a series of industries via harsh measures and made ham-handed statements that have shaken consumer and business confidence. A leading Chinese economist at a top think tank has vanished after criticizing Xi in a private group on the app WeChat, according to The Wall Street Journal. Zhu Hengpeng the director of the Public Policy Research Center at the state-run Chinese Academy of Social Sciences, hasn’t been seen since April, and has been stripped of his role. Zhu reportedly “improperly discussed central policies,” and even referred to “Xi’s mortality.”

The well-regarded academy reports directly to the cabinet. But Xi and the party he directs have warned against criticizing the economy, with analysts and investment banks told not to emphasize negative economic news. You can see an example of that here, where a 0.4% decline in profits in the second quarter for the 5,104 listed companies in Shanghai and Shenzhen is spun as a positive as “firms sustain recovery momentum,” since the decline in profits wasn’t as bad as the 4.5% drop in profits in the first quarter.

The cabinet’s statements today, at a meeting led by Xi, do finally demonstrate an admission that something is really wrong, and that direct spending is necessary. We await the concrete specifics, but if Beijing does stop the death spiral in the property market, it would sustain the market gains.

At the time of publication, Alex Frew McMillan had no position in any security mentioned.