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China needs to spend up to Rmb10tn ($1.4tn) over two years in stimulus funds to reflate its economy and return it to sustainable growth, investment bank economists said, as concerns grow that deflationary pressures are becoming entrenched.
The stimulus, which would be up to 2.5 times the “bazooka” package China enacted after the global financial crisis in 2008, would need to directly target households through social welfare spending rather than investment and infrastructure, they said.
They warned that the matter was becoming more urgent — the more embedded deflation became, the more it would cost to dispel it through stimulus measures. Their estimates underline the scale of Chinese policymakers’ challenge as they try to reinvigorate growth in the world’s second-biggest economy.
“The longer that deflation stays, the bigger the ask in terms of reflation,” said Robin Xing, chief China economist at Morgan Stanley.
In light of a prolonged property downturn, households have cut back on spending and increased savings, with the seasonally adjusted household savings rate in the second quarter at about 31 per cent, according to Goldman Sachs.
Beijing has responded to weak consumer confidence by pumping loans into the industrial sector, relying on manufacturing and exports to keep the economy going while property grinds through a huge oversupply of unsold houses. But this has also increased the supply of consumer goods at a time of low demand, worsening deflation.
Beijing is targeting 5 per cent real GDP growth this year. But economists said deflationary pressures were hitting nominal growth, which was 4 per cent year on year in the second quarter, denting corporate profits and leading to lay-offs and salary cuts.
China’s producer price index has been in deflationary territory for the past 23 months, with data released on Monday showing it declined 1.8 per cent year on year in August, worse than analysts’ expectations. The consumer price index has fared a little better thanks to volatile food costs but has been mostly flat.
Morgan Stanley’s Xing said in a “bull case”, Beijing could issue Rmb10tn in stimulus funds over two years — Rmb7tn to boost social welfare spending for China’s 250mn so-called migrant workers, who are under-covered by existing pension and healthcare systems. The other Rmb3tn would be used to accelerate the sale of China’s massive housing inventory and more quickly stabilise property prices.
He calculated that this would require an annual increase in China’s augmented budget deficit — which includes all levels of government spending — from 11 per cent to 14 per cent of GDP. But it would eliminate deflationary pressures and push nominal economic growth above 5 per cent in the coming years. If China follows the status quo, he said, deflationary pressures would push real growth to about 4 per cent this year and next.
Hui Shan, chief China economist at Goldman Sachs, said China would need about Rmb3tn to stabilise the property market and another Rmb1tn for cash-strapped local governments, after which the government could undertake some much-needed social welfare reforms, such as beefing up unemployment insurance.
“You need to give people the confidence that the government is helping the people, not only building more infrastructure or just following the old stimulus playbook. So you need about Rmb5tn just to have a meaningful impact,” she said.
Chris Beddor, deputy director of China research at Gavekal, estimated hat China needed between Rmb3tn and Rmb8tn in direct transfers to households to “return household consumption to the pre-pandemic trend”.
Larry Hu, chief China economist at Macquarie, said although his bank had no official estimate, he agreed that Rmb5tn to Rmb10tn would be a “reasonable” estimate for money needed to reflate the economy.
The ultimate total would depend on whether the aim was to just hit the 5 per cent real GDP growth target or “ending deflation now”, he said. “The latter takes much more than the first one.”
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Fred Neumann, chief Asia economist at HSBC, said Rmb5tn would be a “baseline” number for stabilising prices.
“There is a phenomenon here where there’s been a lack of confidence, this very high household savings rate for example. People do not want to spend. So it’s really about bringing confidence back rather than necessarily the size of the package,” he said.
China has announced a series of smaller confidence-boosting measures, such as consumer appliance trade-in schemes and industrial equipment upgrades to boost consumption, but incremental measures often lost their impact, Neumann said.
“So that’s why ‘shock and awe’ is sometimes the right approach,” he added. “There’s a risk that we’ve been so incremental over the past 18 months that every announcement doesn’t rebuild that confidence that we need.”
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