context: Frustration is starting to pile up in the PRC. Declines in the property sector and equities have hit the financial sector hard, resulting in large layoffs and salary caps. For over a year the sector has sought strong fiscal stimulus to improve returns and get the economy running again. Beijing ignored these pleas, focusing its limited resources instead on historic investments in scitech innovation and green energy buildouts, allowing the property sector to continue declining. The message is clear: the financial sector is to ‘eat bitter’ as the country focuses on its transition towards high-quality development.
Policymakers are repeating the mistakes made in regulating Covid, contends Zhao Jian 赵建 Atlantis Research Institute dean. The public is confused in regards to Beijing’s economic policy. As real estate and stock markets continue to decline, many are worried about their retirement funds and if there are suitable investments available to ensure they will receive what they need.
Zhao's comments, now scrubbed from the domestic internet, should be understood as a demonstration of this mounting frustration.
The centre is treating the economy like an overbearing parent, excessively involving itself in the market, preventing it from self-correcting according to current conditions. This comes as it hesitates to spend significantly, fearing if it uses its resources now it will be unable to answer a future crisis.
As a result, businesses and households are deleveraging, even as the government is expanding balance sheets. Evidence of this includes
- falling consumption demand
- two years of declining producer prices
- five quarters with a negative GDP deflator
- a shrinking narrow (M1) money supply
Beijing looks like it is trying to get involved but is not meeting expectations. Some moves, like making banks sell bonds to raise yields, make no sense, leaving people questioning what policymakers are doing: does Beijing realise high-quality development first requires development?
Policymakers are in a tough position. They are looking to stamp out short-term risk, but may end up creating a larger crisis. Case and point are equities: transactions have slowed to a crawl due to excessive interference and the confusion it creates, leading to a possible further collapse. Leaders must consider carefully
- balancing development and regulation in finance
- find balance in monetary policy
- net-interest margin
- US–PRC interest differential
- long- and short-term interest differential
- prudent but effective fiscal policy
Though the overall message is on deepening reform, many agencies are clearly tightening to avoid being held accountable for the difficult state of things, continuing the logic behind dynamic zero Covid, which only accumulates risk rather than relieving it.
We see this in debt relief, where the centre continues to talk about it but has yet to make a clear announcement on a central plan, instead putting out fires as they appear. It has also manifested in the various interest rate corridors regulators are creating. This is a planned economy’s logic, and can only result in a ‘black swan’ event (like with Covid) that forces policy to change abruptly.