Connect with us

Finance

China gears up for big week ahead of U.S. elections, stimulus hopes

Published

on

A flag stall at the Yiwu Wholesale Market in Zhejiang province, China, on May 10, 2019.

Aly Song | Reuters

BEIJING — The size of China’s highly anticipated stimulus plans will likely depend on the outcome of the U.S. presidential election, analysts said.

Investors expect Beijing to announce details on fiscal support Friday. That’s when the standing committee of the National People’s Congress — China’s parliament — is due to wrap up a five-day meeting. The same gathering last year oversaw a rare increase in the fiscal deficit.

This year, the meeting’s timing means any details will be out just days after the U.S. has voted Republican nominee Donald Trump or Democrat rival Kamala Harris in as the next president. Polls are set to close Tuesday local time.

“The size of China’s fiscal stimulus package would be around 10~20% bigger under a Trump win than under the scenario of a Harris win,” Ting Lu, chief China economist at Nomura, said in a note last week.

He cautioned that most of China’s challenges are domestic, though there will be some impact from the U.S. election result.

Stimulus in infrastructure and property, not consumer, will be 'much more positive' for China

Trump has threatened to raise tariffs on U.S. imports from China by 60% — or reportedly by even 200% in an extreme scenario. Harris, currently vice president, has not yet signaled a major departure from the Biden administration’s approach of restricting China’s access to advanced technology.

More tariffs would hit China’s exports, a bright spot in an economy grappling with a real estate slump and tepid consumer demand.

Increased trade restrictions would require China to rely more on domestic demand to boost growth, Zhu Bin, chief economist of Nanhua Futures, said in a video presentation last week. That’s according to a CNBC translation of his Mandarin-language comments.

“Without question we can be certain of one thing — if Trump wins the election, China’s domestic stimulus will only be larger, not smaller,” Zhu said. He expects Trump has a greater chance of winning, which he said would increase downward pressure on the Chinese yuan versus the U.S. dollar.

Political analysts debate whether China’s relations with the U.S. would be better under Trump or Harris.

“I think at this point, probably from China’s view, a potential president Harris [makes it] easier to expect what policies likely come,” said Liqian Ren, leader of quantitative investment at WisdomTree.

That doesn’t mean Beijing will embark on large-scale support. Chinese authorities are “constrained by the U.S.-China competition, so the priority number one is to be able to upgrade technology across the board,” She said. “I think as long as that’s your goal then the government’s willingness to stimulate is still going to be lukewarm.”

Ren expects the scale of stimulus will be determined not by who wins the election, but the stock market reaction.

Market volatility in China, but not the United states, is likely to make “China feel more obligated to counter this volatility,” she said. In contrast to three or four years ago, Ren said, Chinese stock market volatility today has a greater impact on economic confidence.

Chinese stocks have tempered their gains in recent weeks after surging in late September. Chinese President Xi Jinping on Sept. 26 led a high-level meeting calling for strengthening fiscal and monetary policy support, and halting the decline in real estate.

While the People’s Bank of China has cut interest rates, the Ministry of Finance has yet to release details on widely anticipated fiscal stimulus. Finance Minister Lan Fo’an last month hinted at an increase in the deficit, and indicated any changes needed to undergo an approval process before being announced.

How large?

Analyst forecasts for additional debt issuance vary. China is considering more than 10 trillion yuan in debt issuance over a few years, Reuters reported Tuesday, citing sources.

Chinese authorities may not announce a specific number, but if they do, it should be more than 4 trillion yuan, given that was the amount issued in the wake of the 2008 financial crisis, said Zong Liang, chief researcher at Bank of China. He expects the deficit could be expanded beyond 4%.

The Chinese government set a deficit target of 3% for this year, after increasing it to 3.8% late last year.

WisdomTree’s Ren said her analysis of official statements, media reports and investment notes revealed that stimulus expectations are inherently about the same. Whether it is 10 trillion yuan over three to five years, or 2 trillion yuan in one year, the average is about 2 trillion yuan in support a year, she pointed out.

Consumption still in question

“I think people right now are focusing a lot on the topline number,” Ren said. “But they are missing [how] the local government, they are doing a lot of things that are actually counter[ing] stimulus.”

She noted how local authorities have so strictly enforced tax collection in some areas that they have discouraged business activity. Despite some central government support, she said, she expects it will “probably be quite a while” before local authorities “feel they have the cash to spend.”

Dozens of companies in China this year disclosed in stock exchange filings that they have received notices from local authorities to pay back taxes tied to operations as far back as 1994. Local governments once relied on land sales to real estate developers for revenue.

The finance ministry has emphasized its focus on addressing local government debt problems. Analysts have pointed out how additional stimulus will also likely go toward banks, not direct handouts to consumers.

Consumption stimulus may come more from property support at this stage, Citi analysts said in a report Friday. “Having said that, we believe more decisive consumption support could still be a realistic option under more adverse tariff scenarios.”

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Finance

China expected to announce highly anticipated fiscal stimulus package

Published

on

Pictured here is a construction site of property developer Hongkong Land, in Shanghai on Nov. 4, 2024.

Feature China | Future Publishing | Getty Images

BEIJING – China is widely expected to unveil more stimulus on Friday after its parliament ends a five-day meeting.

Authorities here have ramped up stimulus announcements since late September, fueling a stock rally. President Xi Jinping led a meeting on Sept. 26 that called for strengthening fiscal and monetary support, and stopping the real estate market slump.

While the People’s Bank of China has already cut several interest rates, major increases in government debt and spending requires approval by the country’s parliament, called the National People’s Congress.

That approval could be granted at the weeklong meeting of the legislature’s standing committee. During a similar meeting in October of last year, authorities had approved a rare increase in China’s deficit to 3.8%, from 3%, according to state media.

Expectations for the scale of that fiscal support have increased after Donald Trump — who has threatened harsh tariffs on Chinese goods — won the U.S. presidential election this week. But some analysts are still cautious, warning that Beijing may remain conservative and not issue direct support to consumers.

When discussing planned fiscal support at a press conference last month, Minister of Finance Lan Fo’an emphasized the need to address local government debt problems.

Trump will restart the China trade wars with tariff policy, says Evercore ISI's Sarah Bianchi

At the parliamentary meeting so far, officials have reviewed a plan to increase the limit on how much debt local governments can issue, according to state media. The additional quota would go toward swapping out local governments’ hidden debt.

Nomura estimates that China has 50 trillion yuan to 60 trillion yuan ($7 trillion to $8.4 trillion) in such hidden debt, and expects Beijing could allow local authorities to increase deb issuance by 10 trillion yuan over the next few years.

That could save local governments 300 billion yuan in interest payments a year, Nomura said.

In recent years, the country’s real estate slump has drastically limited a significant source of local government revenues. Regional authorities have also had to spend on Covid-19 controls during the pandemic.

Even before then, local Chinese government debt had grown to 22% of GDP by the end of 2019, far more than the growth in revenue available to pay that debt, according to an International Monetary Fund report.

Continue Reading

Finance

Stocks making the biggest moves after hours: ABNB, PINS, EXPE, RIVN

Published

on

Continue Reading

Finance

Traders see good chance Fed cuts again in December, skips in January

Published

on

Federal Reserve Chair Jerome Powell speaks during a news conference following the Nov. 6-7, 2024, Federal Open Market Committee meeting at William McChesney Martin Jr. Federal Reserve Board Building in Washington, D.C., on Nov. 7, 2024.

Andrew Caballero-Reynolds | AFP | Getty Images

Expectations for a December interest rate cut remained strong after the Federal Reserve trimmed rates by a quarter percentage point in November, but market pricing is suggesting the likelihood of a “skip” in January.

On Thursday afternoon, the U.S. central bank lowered the federal funds rate, which determines what banks charge each other for overnight lending, to a target range of 4.5% to 4.75%.

Before the Fed released this decision at 2 p.m. ET, market pricing pointed toward a 67% chance of another quarter-point cut in December and a 33% chance of a pause that month, according to the CME FedWatch Tool.

The probability of a quarter-point December rate cut rose to more than 70% following the meeting, while the chances of a pause slipped to nearly 29%. Future rate probabilities found in the CME FedWatch Tool are derived from trading in 30-day fed funds futures contracts.

Meanwhile, the odds that the Federal Reserve would skip an interest rate cut in January was around 71%. This was slightly higher from 67% before the release of the Fed’s November decision on Thursday afternoon.

— CNBC’s Jeff Cox contributed to this report.

Don’t miss these insights from CNBC PRO

Continue Reading

Trending