China rolled out an enormous $586 billion in stimulus spending at the height of the GFC – a package that may have turned the tide of a global recession. But 10 years on, China is reluctant to repeat the stimulus due to the fact that it led to serious misallocation of capital and other negative side effects including serious pollution and high debt.
“Too much debt is seen as a societal risk,” said Ben Powell, chief APAC strategist at BlackRock Investment Institute. “This has resulted in a strong conviction among China’s leaders that austerity is good. It could both strengthen the economy and help in the fight against corruption, pollution, and inequality. This was the mindset that China went into 2020 with.”
China made debt the focus of one of its “three critical battles”, which also included pollution and poverty, as it attempted to become a “moderately prosperous society”. But China is now facing the same problems every other country is – primarily, extremely high unemployment – and that could mean its hand is forced.
“Special federal government bonds have already been announced,” Mr Powell said. “This is a once-a-decade policy move previously seen in 1998 and 2007. It seems logical that a once-a-decade policy would only be rolled out if the intention was to do something big.”
BlackRock’s systematic active equity team has also been performing text analysis on CCP mouthpiece the People’s Daily which shows that there have been “meaningful increases” in references to jobs and domestic demand. Mr Powell believes that analysis fits with his forecast for fiscal stimulus.
“The unemployment picture is enough to have shifted policy emphasis toward extra stimulus, in my view,” Mr Powell said. “We have seen this to some degree in monetary policy with rate cuts in recent weeks.”
China is also likely to make sweeping changes to its Hukou household registration system, which has historically been used to control the migration of rural residents to citizens, in order to incentivise migration to smaller cities.
