The government is prioritizing growth, a fact made clear at the recent Two Sessions, a key political event to watch for economic targets and policy signals. Policymakers set the same GDP growth target of around 5% for this year, pledging to put the economy on a sustainable growth path by transforming the existing development model and at the same time ease the overhang of the property crisis and local indebtedness. Besides an off-budget issuance of special ultra-long term treasury bonds at CNY 1 trillion, proposed stimulus measures are fairly moderate and within expectations. Those calling for a large scale stimulus or bold policy shifts to lift the still-soft economy in the short term and fix structural imbalances in the long term could be disappointed.
Taking into account all that has been put forward, the market response to stimulus measures has been muted. And while the extra stimulus this year pales in comparison to measures in 2008 and 2015, scale does not appear to be the deciding factor here. Looking below the surface, the current predicament is a confidence issue.
Chinese people have built and accumulated a great deal of wealth over the last 30, 40 years, and without downplaying the property market related wealth destruction in the last three years, there is still plenty of household wealth. Domestic tourism can serve as a quick reference point: Travel activities have been growing 5-7% every year since 2018 and reached 120% of the 2019 level this Chinese New Year (source: Ministry of Culture and Tourism, Wind, UBS estimates).
Wealth is not translating into spending on big-ticket items or long-term investments because a lack of confidence has arguably become sticky in the general public as well as in some entrepreneurs. Entrepreneurs are in a wait-and-see mode, not investing dynamically to capture future opportunities. Although policymakers pledge support, more needs to be put in action to rebuild consumer and business confidence. Once confidence returns, stimulus measures would have a much stronger impact than now.
In a sense, global investors feel the same way as Chinese consumers and entrepreneurs. International money is leaving the stock market, leaving China allocations at their lowest levels in years. Foreign direct investment (FDI) is trending downward, having turned negative briefly last year and back in positive territory on a net basis. We are less concerned about the outgoing capital itself since the Chinese banking system is well developed and has ample liquidity. However, the benefits from FDI go beyond money. Chinese companies have gained valuable lessons from working with foreign companies, and diminished exchanges are a setback that should be reversed.