Tight US election casts a shadow over China’s economic planning

While the world anxiously awaits the outcome and potentially volatile aftermath of the US election, one of China’s key policymaking bodies has been deliberating the form and magnitude of its much-anticipated fiscal stimulus package.

The National People’s Congress Standing Committee started its five-day meeting on Monday after a delay that, coincidentally or not, aligned it with a US election that has very significant implications for China.

With Donald Trump threatening a 60 per cent tariff on imports from China, along with a 10 to 20 per cent baseline tariff on all imports, a Trump presidency could shave percentage points off China’s GDP growth rate.

Then-US president Donald Trump, left, and Chinese President Xi Jinping during the G20 summit in Japan in 2019.Credit: AP

Kamala Harris is unlikely to break away from the Biden administration’s more targeted tariffs on strategic exports to and imports from China. A Harris presidency would be less threatening to China and more predictable – broadly a continuation of the status quo or, as the administration has described it, a “small yard, high fence” approach.

The extent of differences in the two contenders’ approaches to the US relationship with China makes it unlikely that the policymakers meeting in Beijing will deploy all available firepower to stimulate growth in a sluggish economy that has been experiencing deflation.

In particular, there are low expectations for the deployment of the fiscal “bazooka” – massive stimulus to consumption – that the markets and many economists inside and outside China have been calling for.

The sharemarket initially soared and, while it has since fallen back.

Rather, it is expected that any announcement at the end of the week will be directed at stabilising local governments’ finances and recapitalising banks, and include some modest measures to try to help property developers and China’s distressed property market.

In other words, Beijing is likely to seek to put a floor under the economy, with the relatively modest ambition of achieving the government’s targeted GDP growth rate of “around 5 per cent” for this year.

It was the economy’s performance in the first nine months of this year, when growth was undershooting that target, that caused the People’s Bank of China to launch a major package of monetary policy stimulus last month. A range of measures were designed to boost an ailing sharemarket, inject liquidity and greater lending capacity into the major banks, and stimulate some activity in the depressed and shrinking property market.

The PBOC measures have had some success. The sharemarket initially soared and, while it has since fallen back, remains well above the levels it was experiencing before the stimulus. There have also been some tentative signs of life in the property market, with sales activity picking up a little in the major cities.

Monetary policy, however, has some limitations. The PBOC can make loans cheaper and more available but, unlike its funding for acquisitions of shares by state-owned or regulated institutions, it can’t force households to borrow. Its lowering of interest rates and injections of liquidity into the banks have been likened to pushing on a string.

That’s why policymakers in Beijing have been focused on adding a fiscal element to the PBOC’s existing stimulus.

There have been clear signals from Beijing that no fiscal largesse would flow from this week’s meeting.

Given the proximity to the US election, China’s policymakers might keep something significant in reserve, with a consensus among China watchers that another Trump presidency would result in a significantly greater fiscal response than if Harris wins.

A Kamala Harris presidency would be less threatening to China and more predictable.Credit: AP

There’s a Politburo meeting of the Communist Party’s 24 most senior officials, including Xi Jinping, scheduled for December, followed almost immediately by the Central Economic Work Conference that will set the economic agenda for 2025. Those meetings would seem better timed to respond, if necessary, to the US election outcome.

What is expected from this week’s discussions is a debt swap for local governments that would enable them to bring the off-balance-sheet, or “hidden”, borrowings in local government financing vehicles onto their balance sheets, with that debt replaced by sovereign debt with significantly lower interest costs.

Estimates of the overall package size range from about 6 trillion yuan ($1.3 trillion) to 10 trillion yuan, with the restructuring of local government balance sheets accounting for the larger part of it.

That would free up funding capacity for the entities that do the most government spending in China. To the extent that they use that capacity, it would provide some stimulus.

The local governments’ capacity to spend has been substantially eroded by the distressed state of China’s property markets, in which sales and related activity once generated 30 per cent or more of their revenues.

It is hoped that the debt swap will enable them to fund their normal activities – paying hitherto unpaid civil service salaries and suppliers – and let them acquire undeveloped land from developers, thereby injecting liquidity into property companies.

The other element expected to be announced within that envelope of the 6 to 10 trillion yuan of special sovereign bond issues is the recapitalisation of China’s large state-owned banks. They have been damaged by the implosion of the property sector, whose net interest margins have been squeezed by the continuing falls in the PBOC’s policy rates even as Beijing has directed them to lend more.

The hope is that the recapitalisation will enable them to lend profitably at lower interest rates and restore their capital bases.

In effect, at the core of the measures expected is the recapitalisation of the key institutions within the economy that have been most hit by the property market’s collapse and economic slowdown. Beijing is more focused on financial stability than boosting consumption.

It is possible some direct support for households might emerge from this week’s meeting, but large-scale stimulus is unlikely given Xi’s distaste for what he regards as wasteful spending. He prefers to focus government spending on advanced manufacturing and his strategy of dominating key technologies.

If there were to be any efforts to boost consumption, it would more probably be directed at the social security net – health and education services and support for the unemployed and lowest income groups – but limited in scope and scale.

This week’s meeting of China’s senior officials appears to have the simple goal of shoring up financial stability and achieving the party’s growth target for this year while remaining open-minded about the possibility of doing more, particularly to boost domestic demand, if deemed necessary this year or early next.

Whether it will be necessary may depend on the outcome of the US election, with China and economies that depend on it – such as Australia’s – facing very different and more threatened futures if Trump is back in the White House and does what he has said he will do.

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