A flag stall at the Yiwu wholesale market in Zhejiang Province, China, on May 10, 2019.
Alison Song | Reuters
BEIJING – The size of China’s much-anticipated economic stimulus package may depend on the outcome of the U.S. presidential election, analysts say.
Investors expect Beijing to announce details of fiscal support on Friday. By then, the Standing Committee of the National People’s Congress (China’s parliament) will conclude a five-day session. The same meeting last year resulted in a rare increase in the fiscal deficit.
This year, the conference’s schedule means any details will come just days after the United States votes to elect either Republican Donald Trump or Democratic rival Kamala Harris as the next president. Voting ends on Tuesday local time.
Lu Ting, chief China economist at Nomura Securities, said in a report last week that “if Trump wins, the scale of China’s fiscal stimulus plan will be about 10% to 20% larger than if Harris wins.”
He warned that most of the challenges China faced were domestic, although the outcome of the U.S. election would also have some impact.
Trump threatens to raise tariffs on U.S. imports from China by 60%, and reportedly even raises tariffs 200% in extreme cases. Current Vice President Harris has yet to signal that she will significantly change the Biden administration’s approach to restricting China’s access to advanced technology.
More tariffs would hit China’s exports, a bright spot in an economy grappling with a housing downturn and tepid consumer demand.
Zhu Bin, chief economist at Nanhua Futures, said in a video presentation last week that increasing trade restrictions will require China to rely more on domestic demand to boost growth. That’s according to CNBC’s translation of its Chinese comments.
“Without a doubt, we can be sure of one thing – if Trump wins the election, China’s domestic stimulus will only be bigger, not smaller,” Zhu said. He expects a greater chance of Trump winning, which he said would add downward pressure on the yuan against the dollar.
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“I think at this point, probably from China’s perspective, a potential Harris presidency makes it easier to anticipate what policies might be introduced,” said Ren Liqian, head of quantitative investment at WisdomTree.
This does not mean that Beijing will start supporting on a large scale. She said the Chinese authorities “are constrained by competition between the United States and China, so the first priority is to comprehensively upgrade technology.” “I think as long as that’s your goal, the government’s appetite for stimulus is still going to be lukewarm.”
Ren expects the size of the stimulus to depend not on who wins the election but on the reaction of the stock market.
She said market volatility in China rather than the United States could make “China feel more obligated to deal with that volatility.” Ren Zhengfei said that compared with three or four years ago, fluctuations in China’s stock market now have a greater impact on economic confidence.
After Chinese stocks soared in late September, gains have eased in recent weeks. On September 26, President Xi Jinping presided over a high-level meeting and called for strengthening fiscal and monetary policy support and curbing the decline of real estate.
Although the People’s Bank of China has cut interest rates, the Ministry of Finance has yet to release details of widely expected fiscal stimulus measures. Finance Minister Lanfouyan last month hinted that the deficit would increase and said any changes would need to go through an approval process before being announced.
How big is it?
Analyst forecasts for additional debt issuance vary. China is considering Reuters quoted sources as saying on Tuesday that more than 10 trillion yuan in bonds would be issued within a few years.
Zong Liang, chief researcher at the Bank of China, said Chinese authorities may not announce specific figures, but if they are announced, it should exceed 4 trillion yuan because this is the amount issued after the 2008 financial crisis. He predicts that the deficit may expand to more than 4%.
The Chinese government set a deficit target of 3% this year after raising it to 3.8% at the end of last year.
WisdomTree’s Ren said her analysis of official statements, media reports and investment notes showed stimulus expectations were essentially the same. She pointed out that whether it is 10 trillion yuan in three to five years, or 2 trillion yuan a year, the average annual support is about 2 trillion yuan.
There are still doubts about consumption
“I think people are very focused on the revenue numbers right now,” Ren said. “But they lack local government and they’re doing a lot of things that are actually countering the stimulus.”
She noted that local authorities impose strict taxes in some areas, hampering business activity. She said that despite some support from central government, she expected it would “probably be quite some time” before local authorities “feel they have enough cash to spend”.
This year, dozens of companies in China disclosed in stock exchange filings that they had received As early as 1994, local authorities issued notices demanding repayment of taxes related to the operations.
The Ministry of Finance emphasized the need to focus on solving local government debt problems. Analysts noted that additional stimulus may also go to banks rather than directly to consumers.
Citi analysts said in a report on Friday that consumption stimulus at this stage may come more from real estate support. “That said, we believe more decisive consumer support remains a realistic option in a more adverse tariff scenario.”
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