Aurelia Butler

BEIJING (Reuters) -China pledged on Saturday to “significantly increase” debt to revive its sputtering economy, but left investors guessing on the overall size of the stimulus package, a vital detail to gauge the longevity of its recent stock market rally.Finance Minister Lan Foan told a press conference Beijing will help local governments tackle their debt problems, offer subsidies to people with low incomes, support the property market and replenish state banks’ capital, among other measures.These are all steps investors have been urging China to take as the world’s second-largest economy loses momentum and struggles to overcome deflationary pressures and lift consumer confidence amid a sharp property market downturn.But Lan’s omission of a dollar figure for the package is likely to prolong investors’ nervous wait for a clearer policy roadmap until the next meeting of China’s rubber-stamp legislature, which approves extra debt issuance. A date for the meeting has yet to be announced but it is expected in coming weeks.The press conference “was strong on determination but lacking in numerical details,” said Vasu Menon, managing director for investment strategy at OCBC in Singapore.”The big bang fiscal stimulus that investors were hoping for to keep the stock market rally going did not come through,” said Menon, adding this may “disappoint some” in the market. A wide range of economic data in recent months has missed forecasts, raising concerns among economists and investors that the government’s roughly 5% growth target this year was at risk and that a longer-term structural slowdown could be in play. Data for September, which will be released over the coming week, is expected to show further weakness, but officials have expressed “full confidence” that the 2024 target will be met.New fiscal stimulus has been the subject of intense speculation in global financial markets after a September meeting of the Communist Party’s top leaders, the Politburo, signalled an increased sense of urgency about the economy.Chinese stocks reached two-year highs, spiking 25% within days since that meeting, before retreating as nerves set in given the absence of further policy details from officials. Global commodity markets from iron ore to industrial metals and oil have also been volatile on hopes stimulus will stoke sluggish Chinese demand.Reuters reported last month that China plans to issue special sovereign bonds worth about 2 trillion yuan ($284.43 billion) this year as part of fresh fiscal stimulus. Half of that would be used to help local governments tackle their debt problems, while the other half will subsidise purchases of home appliances and other goods as well as finance a monthly allowance of about 800 yuan, or $114, per child to all households with two or more children.Separately, Bloomberg News reported that China is also considering injecting up to 1 trillion yuan of capital into its biggest state banks, though analysts say more lending firepower will come up against stubbornly weak credit demand.STIMULUS STEP-UPThe central bank in late September announced the most aggressive monetary support measures since the COVID-19 pandemic, including interest rate cuts, a 1 trillion yuan liquidity injection and other steps to support the property and stock markets.While the measures have lifted market sentiment, analysts say Beijing also needs to firmly address more deeply-rooted structural issues such as boosting consumption and reducing its reliance on debt-fuelled infrastructure investment.Most of China’s fiscal stimulus still goes into investment, but this leads to debt outpacing economic growth as returns are dwindling.The International Monetary Fund estimates central government debt at 24% of economic output. But the fund calculates overall public debt, including that of local governments, at about $16 trillion, or 116% of GDP.”There is still relatively big room for China to issue debt and increase the fiscal deficit,” said Lan.He added local governments still have a combined 2.3 trillion yuan to spend in the last three months of this year, including debt quotas and unused funds. Municipalities will be allowed to repurchase unused land from property developers, he said.Low wages, high youth unemployment and a feeble social safety net mean China’s household spending is less than 40% of annual economic output, some 20 percentage points below the global average. Investment, by comparison, is 20 points above.Chinese officials have repeatedly pledged over the past decade to increase efforts to boost domestic demand, but made little progress on that front, which would require a fundamental structural re-think of many policies and institutions.Lan said more reforms will be announced “step-by-step.” “The focus seems to be around funding the fiscal gap and solving local government debt risks,” Huang Xuefeng, credit research director at Shanghai Anfang Private Fund Co, said of the press briefing.”Without arrangements targeting demand and investment, it’s hard to ease deflationary pressure.” More

“If the European side, while negotiating with China, conducts separate price commitment negotiations with some companies, it will shake the foundation and mutual trust of the negotiations … and be detrimental to advancing the overall negotiation process,” China’s Ministry of Commerce said in comments published on its website.It didn’t cite any evidence for the EU carrying out these separate talks beyond saying there had been “relevant reports”.The comments come days after Brussels rejected a Chinese proposal for EVs made in China to be sold within the bloc at a minimum price of 30,000 euros ($32,000), a move Beijing hoped would avert EU tariffs being imposed next month.Various manufacturers including European-owned companies in China have authorized the China Chamber of Commerce for Machinery and Electronics to propose a price commitment plan that represents the overall position of the industry, the commerce ministry said.”This is the basis for the current China-EU consultations,” it added. More

Among other things, the report points out a significant shift, particularly driven by lower-income households, who are moving away from traditional brick-and-mortar (B&M) stores in search of better online deals.“Compared to 2019, 5% of in-person B&M spending during the holidays has shifted away from Black Friday and Christmas Eve last year, as consumers shop earlier and online,” the report states. Meanwhile, Cyber Monday has gained a 2% share of holiday spending, signaling a growing preference for online convenience over in-store experiences.This surge in online shopping, which accelerated during the pandemic, has shown little sign of slowing down, even as restrictions have eased.The August 2024 data suggests that online spending made up 26% of total retail card spending, with a 1.5 percentage point increase over the past two years, largely driven by households earning less than $50K annually.This trend of “trading lines for screens” is especially relevant during the holiday season, as consumers seek convenience and savings. For example, online sales peak around Cyber Monday, with a bump seen again just before Christmas as shoppers allow time for deliveries.Interestingly, higher-income households have not abandoned shopping malls to the same extent.While lower-income consumers have shifted significantly to online platforms—mall spending for these households has fallen 20% since 2021—higher-income households have only reduced their mall expenditures by 4%.“This suggests much more stability for higher-end shopping malls,” BofA remarked.Overall, the bank’s findings indicate that while traditional holiday hotspots like Black Friday and Christmas Eve still hold sway for B&M spending, their influence is waning.The share of holiday spending happening in malls during the two weeks around Christmas dropped to 15% in 2023, down 3 percentage points from 2019. In contrast, online spending during the same period has risen to nearly match that of B&M stores.“13% of 2023 total retail (excluding groceries, restaurants and gas) spending during the holidays occurred online in the two weeks around Cyber Monday, up 2 percentage points compared to 2019 and now accounting for nearly the same share of retail spending during the holidays as B&M retail spending around Black Friday,” BofA said.Looking ahead, it will be interesting to see if recent port strikes will have an impact on holiday shopping trends, though BofA Global Research suggests minimal disruption unless the strikes are prolonged. Retailers may absorb additional costs to avoid passing them on to consumers.As the 2024 holiday season approaches, online spending is expected to grow, with consumers shopping earlier.Lower-income households, in particular, will likely focus on value and bargains, making the retail landscape highly competitive. More

According to Wells Fargo, the size of the cut, alongside Fed chair Jerome Powell’s commentary, signaled some concern over the state or direction of the job market and less concern regarding inflation.“Powell indicated during his press conference that the labor market was in a strong place, and the Fed’s rate decision was intended to keep it there,” Wells Fargo strategists said in a recent note.Federal Open Market Committee (FOMC) members expect unemployment to rise slightly, to 4.4% for 2024 and 2025, while GDP growth is projected at 2.0% annually during the same period.According to Wells Fargo, this suggests that the “labor market that is cooling, but not considerably.”“Notably, the FOMC members also see inflation continuing to decline. We believe this base scenario sets the stage for rate cuts but leaves their magnitude in question, especially for the implied rate cuts in 2025,” they added.However, the Fed’s updated projections differ from market expectations. According to the report, the market is pricing in 125 bps of rate cuts for both 2024 and 2025, which is more aggressive than the Fed’s median projection of 100 bps of cuts in each year.“With all but one FOMC participant seeing 100 bps or less of cuts in 2024, the market may be in for some disappointment,” strategists continued.“Market pricing would require at least one additional 50 bps cut in 2024 instead of two 25 bps cuts, which we do not believe is supported by the current state of the labor market. Also, judging by commentary from Powell, we do not believe the Fed sees that outcome either.”Looking ahead, strategists remain cautious about the market’s expectations for the Fed’s rate-cutting cycle, considering them “too optimistic.” They suggest that a total of 200 bps of cuts through 2025 would likely require a notably worse economic environment than either their own or the Fed’s current projections.“If the economy continues to move toward a gradual slowdown followed by a recovery in the second half of 2025, as we expect, we believe the cut in September will probably be the only 50 bp rate cut we see in this cycle,” the note states.Also, Wells Fargo believes inflation could potentially resurge by mid-2025, which could limit the Fed’s ability to implement all the rate cuts it has projected.In their view, a more realistic scenario would see an additional 50 bps of cuts in 2024 and 75 bps in 2025. More