Aurelia Butler

This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Sign up here to get the newsletter sent straight to your inbox every ThursdayWasn’t it supposed to be about the economy? Putting a question mark on James Carville’s insight from the 1992 US presidential contest is the best way to capture the strangeness of this year’s US presidential election. Today’s article confronts how the economy is behaving differently — in a good way — from what it has done for many decades, yet political polling doesn’t seem to reflect that at all. But first, a word of thanks to Tej Parikh for brilliantly keeping Free Lunch going last week. If you missed it, go back now to read his piece on signs of weakness in the US economy, as it provides useful background for the puzzle we’re about to discuss. Almost as old as the Carville quote is the head-scratching about why Americans do not vote in line with their economic interests. The anti-Carville thesis came of age with What’s the Matter with Kansas, Thomas Frank’s 2004 book about how the Midwestern state shifted to cultural rather than economic voting patterns. The debate about “culture versus economics” has been raging ever since, of course, and reached fever pitch after the election of Donald Trump in 2016. It has also gone international, with the need to explain the rise of nativist populism in virtually all western countries.As regular Free Lunchers will know, I have long been on the economics side of this. Without denying that the political polarisation we see in varying degrees everywhere takes a cultural expression, we need to recognise the economic disempowerment that generally triggers those “values conflicts”. My favourite example is how even in Sweden, the rise of nativist populism can be attributed to groups being left behind economically.This sort of analysis is leading people like myself to support policies of the sort the Biden administration has adopted. They are the best chance to give a better deal to those left behind by the structural economic changes of the past 40 years, and that should reduce the allure of illiberal, anti-democratic nativist movements.But the current political situation in the US forces me to ask whether I was wrong. More precisely: why, given that President Joe Biden’s policies are reversing a lot of the past economic damage, is he not getting credit for this in voter support? Does it mean economics was not at the root of things after all?Before attempting an answer, let’s just survey the facts. First, consider the evidence that the policies are, in fact, undoing the past damage. Economist Arin Dube’s Substack covers some of the striking developments in real wages since the pandemic. In his words:Using data from the household-based Current Population Survey through December 2023, the average wage for the middle quintile of workers (based on hourly earnings) stands higher than: 1) prior to December of 2019 (right before the pandemic), 2) December of 2020 (right before the start of the Biden presidency), and 3) what would be expected based on trends from the five years prior to the pandemic (2015-2019).You can see this visually on his graph (it greys out the most disruptive period when the composition of jobs changed when a lot of lower-paid people were fired and then hired again) — click here for a larger version.And the news is even better when looking at the low paid. While middle-of-the-road workers enjoy higher real wages than four years ago and higher than they could have been expected to enjoy without the pandemic, they did suffer real wage stagnation during the worst inflationary period. But if you include those below the middle — Dube looks at the lowest 60 per cent and 80 per cent — their real wages didn’t fall even then, because wage growth has been so much stronger at the bottom end of the labour market. (In another post, Dube also shows how strong labour markets have narrowed racial wage and job disparities to their lowest levels on record).In fact, this lifting of wages at the bottom has undone nearly 40 per cent of the previous four-decade increase in wage inequality.That, then, is the main achievement of the large fiscal spending on workers that has been so strongly criticised by those who think Biden should have been less generous and worried more about inflation. Then there are the industrial effects of Biden’s manufacturing subsidy programmes, which have produced a jump in manufacturing construction and infrastructure spending. There are more US factory jobs than at any point since the end of 2008.So the economic achievements are clear (although as Tej pointed out last week, they may be starting to wane). But the second important fact, then, is that political polling hardly reflects these economic outcomes at all. Paul Krugman has been looking at this puzzle for some time, offering two part-explanations. One points to how people tend to say things are going well for themselves even as they say they are going badly for the country. That’s what the FT’s very own poll suggests, which finds a much larger share of respondents assessing their personal economic situation positively than the economic conditions of the country as a whole (46 per cent compared with 27 per cent; both figures have risen in the past three months). So perhaps it’s the media’s fault: people are wrongly cued to think that the general situation is worse than what their personal experience tells them — a misanthropic version of the Lake Wobegon effect, as it were.Krugman’s other explanation relies on the observation that survey responses to economic questions have become strikingly partisan: people tend to say economic conditions are good (bad) when their party is (not) in power (see John Burn-Murdoch’s chart below). Krugman highlights how this bias is stronger among Republican than Democratic voters, which would increase the negative bias at the moment. Perhaps this can account for the most striking finding of the same FT poll: a higher share of voters — 42 to 31 per cent — say they trust Trump rather than Biden most to handle the economy.These sets of facts, of course, just elaborate the puzzle. Why doesn’t the undeniable economic progress show up in political polling? Is it that Carville is passé, and political support is not (or no longer) about the economy? Or is it still the economy, stupid, but we are missing something and if so what?If the answer is simply that the economy no longer matters, then we have no reason to be puzzled by the polls, and we may as well be reconciled to a Trump victory in November. But if, like me, you find it hard to think the economics-to-voting link no longer exists, what could the explanation be? I have three suggestions, neither of which I can defend with enough conviction to hope to be entirely persuasive.One is blaming the media: people think the economy is doing worse than it is and are intending to vote accordingly (against the incumbent). But surely people do know what their real wage is.Another is that it’s the polling that is misleading. That’s easy to say and hard to substantiate, because I know of no indication pollsters are doing their work less well than they used to. (Although there is a case being made that more biased polling is being “weaponised”.) But I do want to cast our minds back to the 2022 midterm election, where the polls made a lot of people whose understanding of US politics I had previously deferred to, expect a “red wave” Republican triumph that never materialised (as you will remember, the GOP barely retook the House and failed to take the Senate). When I dug into the election results back then, I saw signs that Biden’s economic policies did indeed bear electoral fruit. It has made me much more cautious about US polling since. Could conventional wisdom be blindsided again in November? If so, we’ll gloat that “it’s still the economy, stupid”. A third possibility of saving the economics-to-voting link is that it’s not the polling but the economic data that is off. Not that the outcomes I described above haven’t happened, but that these are not what most give people a sense that the economy isn’t working. What could it be instead? My best guess is that even though most Americans have seen constantly rising real wages since the pandemic, they still have good reason to see the economy as a broken system that is stacked against them. An intriguing new study suggests that people’s unhappiness with the economy does not come down to the sort of outcomes I listed above. Instead, there is a deeper, older and presumably harder-to-remove sense of being disempowered, as individuals cannot insure themselves against uncertainty or protect themselves against the greed of others. This is surely linked to the growing feeling of being taken advantage of by Big Tech, which Cory Doctorow sets out so well in his thesis about “enshittification”.As my colleague Rana Foroohar described it in her excellent column this week, the economic malaise comes from recognising how concentrated economic power has become. And so the economics-to-voting link may well remain strong, but people will try to vote for whoever they think is most likely to break up that concentration of power. The paradox is that Biden has done more than anyone since Franklin D Roosevelt to move in that direction. But the pretend iconoclast of real estate heir Trump has the better rhetoric on wanting to break things up. So my takeaway is that it’s still the economics, stupid. But it is understandable, if frustrating, that people do not dare to believe that the all-too-rare case of an ultimate establishment figure belatedly committed to radical reform — which Biden is, like FDR before him — can be for real. Other readablesThere are lessons to draw from the seeming performance of Russia’s economy — but not what President Vladimir Putin would have you think, I argue in my latest FT column. And here’s another sign of decline to add to those mentioned in the piece: Moscow is postponing a lot of ambitious road-building projects.It’s a US election year — and perhaps the country’s most consequential election ever — so get prepared by signing up to our new newsletter, US Election Countdown.Could a hydrogen economy be built by extracting naturally occurring hydrogen from the Earth’s crust? Geologists are starting to say a hydrogen gold rush is possible.Poland’s Prime Minister Donald Tusk has taken an iron broom to clean up the previous government’s desecration of the rule of law. How is it going?My colleague Chris Giles has written an excellent column on how to get the European economy to perform better — in which he, with great reluctance, conditionally joins the high-pressure economy fan club.Numbers newsRecommended newsletters for youChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. 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CAPE TOWN (Reuters) – South Africa will evaluate the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) held at the central bank annually and withdraw from it when funds are available, Finance Minister Enoch Godongwana told Reuters on Thursday. Godongwana said in his annual budget speech on Wednesday that the government was changing the framework governing the GFECRA account to allow it to draw down 150 billion rand ($8 billion) over the next three years to limit its borrowing.South Africa is struggling with an ailing economy and high debt ahead of a general election on May 29 that could see the governing African National Congress party lose its parliamentary majority for the first time since the end of apartheid 30 years ago.Godongwana told Reuters that using the funds to reduce the country’s debt liability was more effective than allocating them to spending.”We are facing a major challenge of debt which is crowding out all other spending,” said Godongwana.The GFECRA account captures gains and losses on the country’s foreign currency reserve transactions and has a balance of more than 500 billion rand, larger than plausible reserve losses from rand appreciation, the National Treasury said.The treasury said the GFECRA drawdown would result in a saving of about 30 billion rand in debt-servicing costs over the next three years and help reduce the debt-to-GDP ratio, now projected to peak at 75.3% of GDP in 2025/26 from an estimate of 77.7% seen in November. Some analysts had proposed that the money be used to pay down the debts of struggling state-owned companies such as Transnet, the ports and logistics firm.But Godongwana said giving money to Transnet would “just be putting money in a hole.” Instead, he said, the firm should implement its turnaround strategy and use its balance sheet to resolve the challenges it faces.Part of that strategy involves privatising parts of the business that Transnet can no longer maintain, a contentious issue for labour unions, particularly so in an election year.Analysts said the government having more frequent access to the GFECRA proceeds also raises concerns of the money being used to clear up fiscal mismanagement.Godongwana said the framework developed would protect against this but he added that if not closely guarded, there was a risk that future administrations could undo those safeguards.($1 = 18.8901 rand) More

TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda said the country’s inflation was accelerating as a trend as a tight labour market pushes up wages, reiterating the bank’s conviction that conditions for ending negative interest rates were falling into place.Speaking in parliament, Ueda said Japan’s economy was likely to experience a positive cycle, in which higher job and wage growth leads to moderate rises in inflation.”Service prices continue to rise moderately,” he said on Thursday. “Trend inflation is also gradually accelerating. We will guide monetary policy appropriately in line with such moves.”He added that Japan was in a “state of inflation,” rather than deflation, and is likely to see prices keep rising.The 10-year Japanese government bond yield rose after the remarks, as investors focused on the chance of a near-term end to negative rates. It last stood at 0.725%.Sources have told Reuters the BOJ was on track to end negative rates in coming months despite Japan’s economy slipping into a recession, on growing signs that companies will continue to offer bumper pay amid a tightening job market.A Reuters poll showed more than 80% of economists expected the BOJ to pull short-term interest rates out of negative territory in April.Expectations that Japan’s borrowing costs will remain very low, however, have pushed down the yen to around 150 against the dollar, a level seen by markets as heightening the chance of yen-buying intervention by Japanese authorities. The dollar stood at 150.26 yen on Thursday.Finance Minister Shunichi Suzuki told the same parliament meeting that authorities were watching currency moves with a high sense of urgency.He said the government had no “defence line” that could trigger action, as it was focusing more on the degree of volatility in exchange-rate markets.Former BOJ board member Makoto Sakurai said the central bank could end negative rates as soon as March, but go slow with raising borrowing costs further.”The BOJ will soon end negative rates but keep monetary conditions accommodative for several years, thereby giving the government time to pursue structural reforms,” he told Reuters on Thursday. More

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1. Nvidia revenues top estimates as chipmaker hails AI “tipping point”Shares in Nvidia (NASDAQ:NVDA) jumped in U.S. after market trade on Wednesday, touching a new record high, after the chipmaker clocked stronger-than-expected fourth-quarter revenues and delivered a sales outlook for the current three-month period that was also above Wall Street estimates.Chief Executive Jensen Huang, weighing in on the boom in artificial intelligence that has fueled a surge in the company’s valuation over the past 12 months, said the nascent technology is at a “tipping point.””Demand is surging worldwide across companies, industries and nations,” he said.Gains in Nvidia, which manufactures the graphics processors that help train AI systems, spilled into Asian semiconductor stocks.Japanese semiconductor testing equipment maker — and Nvidia’s biggest supplier — Advantest Corp. (TYO:6857) rose and was within sight of a record high. Taiwan’s TSMC (TW:2330), the world’s biggest contract chipmaker and a key Nvidia supplier, climbed close to an all-time high as well.2. Futures higher after Nvidia reportsU.S. stock futures pointed to a positive opening in New York on Thursday, with investors hailing Nvidia’s 265% spike in revenue and bullish outlook for AI demand.By 03:11 ET (08:11 GMT), the futures contract for the tech-heavy Nasdaq 100 had jumped by 317 points or 1.8%, while Dow futures had risen by 114 points or 0.3% and S&P 500 futures had gained 50 points or 1.0%.Along with being one of the so-called “Magnificent 7” group of megacap stocks that combined to account for more than 60% of the S&P 500’s total return in 2023, Nvidia is also seen as a bellwether of the AI boom that has helped underpin recent strength in equities.Speaking with investors, Huang said Nvidia’s high-end chips had become the “AI-generation factories” in a new industrial revolution that will encompass “every industry.” The company is now looking to bolster this position, although analysts have flagged that intensifying competition and cooling sales in China may complicate this task.3. Federal Reserve officials uncertain about early interest rates cuts – minutesFederal Reserve policymakers signaled that they were worried about slashing interest rates too soon, saying they needed further confidence that price pressures were continuing to abate, according to the minutes of the Federal Reserve’s January policy meeting released on Wednesday.The minutes showed that “they did not expect it would be appropriate to reduce the target range” for the key federal funds rate until they had “greater confidence” that inflation was cooling back down towards its 2% target.At the conclusion of the gathering on Jan. 31, the Federal Open Market Committee, or FOMC, kept its benchmark rate at a more than two-decade high of 5.25% to 5.5%. But the minutes suggested that the central bank believed rates were likely at their peak “for this tightening cycle.”Since the meeting, economic data points have suggested that putting out the lingering embers of inflation could prove to take longer than anticipated, placing bumps on the road to a “soft landing” — a scenario in which price gains are quelled without sparking a broader downturn in the economy or jobs market.4. Rivian’s annual production guidance misses expectationsRivian (NASDAQ:RIVN) unveiled Wednesday annual production guidance that fell short of Wall Street estimates at a time of waning U.S. demand for electric vehicles.For 2024, the electric truck maker said it expects to produce 57,000 vehicles, missing Wall Street expectations of 66,000. The company is also planning to reduce its salaried workforce by 10% in response to a “challenging macroeconomic environment,” according to media reports.Shares in Rivian fell sharply in after hours trading on Wednesday.5. Oil ticks higherOil prices ticked slightly higher in European trade on Thursday, as bets on tightening global supplies due to disruptions in the Middle East were offset by signs of another outsized build in U.S. inventories.Crude prices have seen wild swings this week as markets grapple with fears of worsening demand and potential supply disruptions from an ongoing conflict in the Middle East.Brent oil futures expiring in April had jumped by 0.2% to $83.23 a barrel, while West Texas Intermediate crude futures had risen 0.3% to $77.53 per barrel by 03:12 ET. More

TOKYO (Reuters) – The Bank of Japan will pull the plug on its eight-year negative interest rate policy in April, according to more than 80% of economists polled by Reuters, marking a long-awaited major shift from a global outlier central bank. Nearly the same proportion of economists, 76%, also expect the BOJ to scrap yield curve control at that meeting, with almost all saying ultra-loose monetary conditions will end then, just months before many major central banks are expected to start cutting rates.The BOJ is on track to end negative interest rates in coming months despite Japan’s economy slipping into a recession, sources have previously told Reuters.In the Feb. 15-20 Reuters poll, 25 of 30 economists, or 83%, said the central bank will in April ditch its minus 0.1% short-term deposit rate, which has been in place since January 2016. “(The BOJ) can make a decision at April’s meeting based on the preliminary results of the annual labour-management wage talks for big firms and the hearings from BOJ branch managers on wage trends in small and mid-sized firms,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities. Two entities, Daiwa Securities and T&D Asset Management, chose March. Another said June and two others selected 2025 or later. “The longer (BOJ) waits, the more likely it is to miss the right moment as the uncertainty of foreign factors increase,” said Mari Iwashita, Daiwa Securities’ chief market economist, referring to an impending policy shift by the BOJ’s peers.Nearly every economist, 91% providing end-quarter rate forecasts, expects negative rate policy to be abandoned by end-year, up from 82% in January’s poll. BOJ Governor Kazuo Ueda, however, has repeatedly stressed Japan’s monetary conditions will likely remain accommodative even after the central bank scraps negative rates. YCC ON ITS LAST LEG, EYES ON WAGE TALKS The poll also showed 25 of 29 economists – or 86% – expecting BOJ to end YCC, far surpassing four who said it would be modified. That was roughly in line with January’s poll. Of those 25 economists, 19 expected the central bank to dismantle YCC in April. All but one of the 19 respondents said an end to negative rates would happen simultaneously. Almost every economist, 97% of those polled, predicted average wage growth and base salary increases in the next fiscal year starting in April would exceed this year’s 3.58% at big Japanese firms, up from 90% when asked in January. For Japanese firms, including small and mid-sized firms, the poll increase was sharper, with 90% of economists anticipating a bigger increase, up from 77% in January and 65% in November. The range of pay increases will fall between 3.6% and 4.36% in mid-March for big companies and between 1.5% and about 4.0% for overall businesses, economists said. (For other stories from the Reuters global economic poll:) More

This article is an on-site version of our Unhedged newsletter. Sign up here to get the newsletter sent straight to your inbox every weekdayGood morning. It’s Kate Duguid in New York; thanks for having me back to guest host Unhedged while Rob is off. It’s never a good idea to be the follow-up act to Katie Martin, but here goes.First, though, Nvidia. The chipmaker’s shares had dipped ahead of yesterday’s earnings, perhaps on the thought that beating investors’ sky-high expectations would be too hard. But no! Nvidia blew estimates out of the water. Its stock was up 9 per cent in after-market trading. If you were looking for a downside, our smart stocks correspondent Nick Megaw notes that sales in China continue to pose a challenge as export rules have forced the company to scale back in the region. But for now it doesn’t seem to be enough to offset blowout numbers everywhere else. Songs of praise can be sent to [email protected]. All complaints to [email protected]. The Fed probably won’t raise rates againIs it bananas to say that the Federal Reserve could raise interest rates this cycle? Put another way, am I willing to call Larry Summers bananas? In an interview with Bloomberg last week, the economist said that because of persistent inflationary pressures, there was a “meaningful” chance — he put the odds at around 15 per cent — that the Fed’s next move on rates could be an increase. “The worst thing you can do when the doctor prescribes you antibiotics is finish part of the course, feel better and give up on the antibiotics,” said Summers. It’s not just Summers, either. Bloomberg followed up the interview with a big piece titled “Markets Start to Speculate If the Next Fed Move Is Up, Not Down”. Mark Nash, who manages the absolute return macro fund at Jupiter Asset Management, told Bloomberg that he put the odds at 20 per cent. (A note on 15 per cent odds — that’s the same chance an NFL kicker has of missing a 37-yard field goal, but also the odds that The New York Times put on Donald Trump winning the 2016 election.)Summers’ argument comes just after a big market rethink of where rates are going. At the start of January, the futures market had six quarter-point cuts priced in. These market expectations were always at odds with the Fed’s own forecasts, but traders were betting on a rapid deceleration in inflation this year — like we saw in the back half of 2023. Since January, the macro picture has changed a bit. Inflation is falling slower than expected and the jobs market looks sturdy. That is on top of clear signals from Fed chair Jay Powell that the Fed would take its time before cutting. So rates traders reined in their expectations. Today, three to four cuts are priced in, starting in June rather than March:Market expectations are now much more in line with the Fed’s own thinking. The central bank’s December projections showed the average official forecasting three cuts in 2024, a view that Powell restated at the bank’s January meeting, and then again in a February interview on CBS’s 60 Minutes. Combining the somewhat more inflationary economic picture with the trend in market expectations for rates, does it make sense to start betting on the chance of a rise? I don’t think so. Start with Summers’ argument. He mostly cited January CPI figures, which did come in hot. Headline inflation cooled less than expected, leaving the year-over-year rate at 3.1 per cent. Core inflation was stagnant at 3.9 per cent. Summers focused especially on “supercore” (non-shelter services) and on owners’ equivalent rent, which rose an annualised 7 per cent in January. Though he conceded it was just one month of data, Summers said the CPI numbers could also mark a “mini paradigm shift”. But that seems far-fetched, or at least too early to tell. The day it happened, Ethan laid out why we should take the data with a grain of salt: inflation expectations look calm, the OER jump looks like noise, and January inflation data tends to be wonky. It is reasonable to think that February’s figures will be a little cooler. Yes, stock and bond markets did take the inflation data poorly. But that speaks less to the data itself than the amount of disinflation and rate-cut optimism priced into markets. The below chart from Meghan Swiber, US rates strategist at Bank of America, shows just how out of whack the market was with Fed expectations. The market-Fed expectations disconnect has only been so wide in previous moments of crisis (March 2020, the Silicon Valley Bank mini-crisis) or during monetary policy pivots: There is no sign from the Fed that it expects to raise interest rates this year. The minutes from January’s Fed meeting, released on Wednesday, showed officials were “highly attentive” to inflation risks and wary of cutting interest rates too quickly. Buoyant stock and credit markets are adding to Fed caution: “several participants mentioned the risk that financial conditions were or could become less restrictive than appropriate, which could add undue momentum to aggregate demand and cause progress on inflation to stall.” But in spite of all these reservations, the Fed is still only talking about rate cuts. “The odds of an outright hike are tough, because the Fed would have to see a significant reacceleration in core inflation momentum, ” said Gennadiy Goldberg, head of US rates strategy at TD Securities. It’s important to note that the Fed can only influence certain types of inflation. Any reacceleration would likely have to occur in core inflation — ie, not including higher energy prices — and would have to reflect overly strong demand. Supply chain snarls might not count.And even in the case of re-accelerating core inflation, the Fed still might not raise rates. Markets are sufficiently all-in on cuts this year that failing to deliver them would be “toxic”, said Goldberg. You could get a dramatic repricing: tanking equity markets, widening corporate credit spreads, much tighter financial conditions. This would do much of the Fed’s work for it. “Just by keeping rates at [today’s] 5.5 per cent, the Fed would be doing a fair amount of tightening,” said Goldberg. This is the strongest point against increases: why would you need them?To have renewed tightening, we’d probably have to see the US labour market heat up more. The labour market’s trend towards better supply-demand balance, which Powell has touted in every recent meeting, would probably have to not just stall, but reverse. This would change the calculus for the Fed. Instead of facing two-sided risks to its dual mandate, the risk of higher unemployment would start looking diminished. Like in 2022, inflation-fighting mode would kick in.So is thinking about rate rises this year bananas? No; it’s a real tail risk. But Summers’ 15 per cent probability strikes me as too high. It’s premature to speak of “mini paradigm shifts”. Markets are pricing in the tail risk more realistically: a 6.3 per cent chance of a quarter-point rate rise in 2024 — closer to getting a false positive on a drug test than missing a 37-yard field goal. One good readThis piece, by the aforementioned Nick Megaw, on wonky trading in Nvidia-linked stocks, is a good read for you, and for the securities regulator in your life. FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, hosted by Ethan Wu and Katie Martin, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youSwamp Notes — Expert insight on the intersection of money and power in US politics. Sign up hereDue Diligence — Top stories from the world of corporate finance. Sign up here More

BEIJING (Reuters) – As the annual meeting of China’s parliament approaches next month, its leaders are facing the greatest pressure in almost a decade to take bold policy decisions that safeguard the economy’s long-term growth potential.The start of the year saw Chinese stocks tumbling to five-year lows on growth concerns and deflation deepening to levels unseen since the global financial crisis, prompting comparisons with the 2015 turmoil that forced policymakers into action.”The last time the Chinese leadership faced this kind of pressure was in 2015,” said Tommy Wu, a senior China economist at Commerzbank (ETR:CBKG), who added, “2024 is a crucial year for China to stabilize the economy.”However, the current situation is a lot more complicated.” China overcame the 2015 crisis by devaluing the yuan and tightening its capital account to prevent outflows, while pouring resources into property and infrastructure, and slashing interest rates by more than 100 basis points. But that policy ammunition is now spent, bent or broken, limiting its options to fix a stuttering economy and find a way out of what threatens to become a self-feeding downward spiral in consumer and investor confidence and economic growth. The property market has been in free fall since 2021 because of a series of defaults among developers after years of overleveraged, bad investments. Infrastructure spending is difficult to sustain because of high levels of local government debt.Further monetary policy easing risks a run on yuan assets due to a yawning interest rate gap with other economies and could exacerbate deflationary pressures as cheap credit flows into China’s industrial complex, ridden with overcapacity.As China’s rubber stamp parliament, the National People’s Congress (NPC), begins its annual meeting on March 5, there has been no indication of major stimulus or a grand reform plan in the making.”It is widely underappreciated how constrained Beijing is at this point, in terms of options to stimulate the economy via fiscal policy, or through more rapid credit growth from banks,” said Logan Wright, a partner at Rhodium Group.”There will be no policy bazookas unveiled at the NPC, in part because China has no good options to maintain growth via its traditional channels.” ‘STUCK BY CHOICE’Fleeing investors have expressed frustration that authorities have not unveiled a clear roadmap to fixing structural issues laid bare last year when the Chinese economy failed to replicate the explosive recovery experienced by other economies after COVID-19.Markets want clear, long-term plans for cleaning up the property sector, restructuring municipal debt, and switching to a more sustainable growth model that relies less on debt-fuelled investment excesses and more on household consumption.The NPC is not the traditional venue for Chinese leaders to declare momentous policy shifts, which are usually reserved for events known as plenums, held by the ruling Communist Party between its once-every-five-year congresses.One such plenum was initially expected in the final months of 2023, and while the meeting could still take place in the near future, the fact that it has not yet been scheduled has deepened investor concerns over policy inaction.At the NPC, Premier Li Qiang is expected to deliver his annual work report and set the year’s economic targets, including steady growth for 2024 at around 5%, and a budget deficit of 3% of gross domestic product.But setting a target similar to last year’s without new policies to redirect resources from infrastructure and manufacturing investment to households runs the risk of hurting confidence, rather than boosting it, analysts say.Fathom Consulting estimates that every additional 10 yuan invested in the Chinese economy today generates 0.2 yuan in output, down from 2.1 yuan in 2002.On the demand front, consumer confidence languishes at record lows more than a year after China ended its COVID lockdowns.”There is a lack of investor confidence and business confidence. But the root cause of this is consumer confidence,” said Joe Peissel, an economic analyst at Trivium China.”The most effective way to deal with this is through reforms that put more cash in consumers’ pockets.”However, (President) Xi Jinping has previously aired an antipathy toward cash transfers or generous social security provision, so this is unlikely.”The rebalancing policies economists and investors are calling for now are steps Xi flagged as early as 2013, but which China never took, resulting in debt levels growing much faster than the economy. Some analysts say policymakers appear to have prioritised social stability and national security over growth sustainability, due to concerns over the disruption engendered by a different development model.That would come about as such measures empower consumers and private businesses at the expense of the government sector.”A big shift now would acknowledge serious long-term mistakes – that’s unlikely,” said Derek Scissors，a specialist in China’s economy at the American Enterprise Institute. “China is stuck, by its own choice.” More