Debate brews in China over fiscal stimulus

Black Myth drives A-share stock gains. China accelerates nuclear program.

Our briefing on critical economic and financial developments in China as of Friday, 23 August, 2024.

• Opinion remains divided in China over the necessity of fiscal stimulus this year, despite near-unanimous agreement on slackening demand as the cause of the country’s economic easing.

• Global popularity of Chinese video game Black Myth: Wukong triggers spike in prices for A-share gaming stocks.

• Changes to Chinese monetary policy cause an increasing disconnect between the medium-term policy rate and the official benchmark rates.

• China accelerates the roll out of its 3rd and 4th generation nuclear reactor fleet.

• State Council official says economic opening is the “hallmark” of China’s development model following the 20th 3rd Plenary Session.

• Beijing wants to drive "drive even more financial resources towards the field of science and tech innovation” with financial guarantee plan.

China's simmering debate over fiscal stimulus is a barrier to effective policy: Xu Gao

Chinese economists are fiercely debating the necessity of fiscal stimulus to deal with the adverse impacts of lacklustre demand, creating a major barrier to clear policy action in the second half.

Xu Gao (徐高), chief economist with BOC International Securities, points out that while Chinese economists are unanimous in their views on the ills of China's economy, they remain divided on the matter of apt solutions.

"At present, there is not too much divergence in terms of assessment of China's economic conditions," Xu wrote in an online opinion piece.

"It's generally considered that China has a demand contraction, putting marked pressure on growth. The risk of this is considerable.

"However, opinions of all parties are divided on the issue of whether or not China need to use stimulus measures to prop up economic growth, with calls of both for and against.

"There is lack of consensus on multiple issues, including whether or not stimulus policies are effective, whether they should be continuous, as well as the short and long-term costs and benefits."

Xu argues that this debate has led to a lack of clarity on likely policy outcomes in the near term.

"Stimulus policies face considerable barriers due to lack of consensus...this is a major impediment to the effectiveness of policy."

A-share gaming stocks boom following mass popularity of Black Myth: Wukong

The global popularity of Chinese-produced video game Black Myth: Wukong has triggered a wave of price spikes amongst gaming-related A-share companies in China.

As of the close of trading on 20 August - the day of Black Myth's release, China Travel United and Zhejiang Edition Media had both posted rises of 10%, while Xinxunda and CITIC Publishing saw gains of 20%.

Huayi Brothers saw its share price leap by over 19%, while other winners included Silk Road Vision, with an over 8% rise, and Shunwang Technology, with a leap of over 7%.

China's gaming ETF failed to post an impressive performance, however, with the Cathay CSI Animation and Gaming ETF falling by 1.55%, and the Huaxia CSI Animation and Gaming ETF declining 1.93%.

State Council approves 11 new 3rd and 4th generation nuclear reactors

Premier Li Qiang announced the approval of five new nuclear plant projects on 18 August, at a regular meeting of the State Council.

According to The Paper, the five nuclear power projects approved by the State Council entail collective investment of over 200 billion yuan, for the development of 11 new nuclear power reactors.

All of the reactors make use of a variety of independent third and fourth-generation nuclear technologies.

The projects include the Jiangsu Xuwei Phase I, Shandong Zhaoyuan Phase I project, Guangdong Lufeng Phase I project and Zhejiang San'ao Phase II project of China National Nuclear Corporation, as well as the Guangxi Bailong Nuclear Power Phase I project of State Power Investment Corporation.

The Jiangsu Xuwei project is the world's first nuclear power plant to combine a high-temperature gas-cooled reactor with a pressurized water reactor, and will primarily be used for industrial heating purposes at the Lianyungang petrochemical industrial base.

China's market-driven monetary policy reforms cause a rates disconnect in August

Ongoing reform of China's monetary policy system has led to an increasing disconnect between benchmark and policy rates.

The monthly benchmark loan prime rates (LPR) announced on 20 August came in at 3.35% for the one-year LPR and 3.85% for the five-year LPR, holding steady with the prints for July.

The LPRs remained unchanged despite the People's Bank of China (PBOC) - which is the Chinese central bank - cutting the rates for its medium-term lending facility (MLF) by 20 basis points on 25 July.

The MLF rate has long been considered the Chinese central bank's main "policy rate," which holds sway over the benchmark rates.

Wen Bin (温彬), chief economist with China Minsheng Bank, writes that the relationship between the LPR the MLF is "dimming," as the central bank pushes for more "market-based" monetary policy that is in line with international practice and centred around short-term rates.

"In future, following the continued deepening of the market-based reforms of interest rates, the MLF rate's role as a reference rate for the LPR will decline," Wen writes.

"There will be a greater shift towards using the central bank's short-term policy rates for reference, gradually clearing out the interest transmission relationship from short-to-long, and continually expediting a rise in the independent pricing capability of financial institutions."

Beijing loosens market entry measures

On 21 August, the Communist Party Central Committee and the State Council jointly issued the "Opinions on Improving Market Entry Systems" (中共中央办公厅 国务院办公厅关于完善市场准入制度的意见).

The Opinions cover ten areas, including improvements to management of the market entry negative list. With regard to the financial sector, the Opinions call for "strengthening coordination of domestic and foreign capital entry policies."

"Opening is the hallmark of Chinese-style modernisation" - State Council official

A leading government academic has reiterated Beijing’s commitment to economic opening in the wake of the Communist Party's historic 20th 3rd Plenary Session.

In an online opinion piece Jiang Xiaojuan (江小涓), State Council deputy-secretary, opined that "opening is the clear hallmark of Chinese-style modernisation."

"The Resolution passed by the Communist Party's 20th 3rd Plenum stresses improvements to systems and mechanisms for high-level external opening," Jiang wrote.

Jiang pointed in particular to key arrangements for "steadily expanding systemic opening, deepening trade system reform, and deepening reform of the management system for foreign investors and outbound foreign investment."

Chinese government to provide financial guarantees to drive enterprise tech innovation

The Ministry of Finance, the Ministry of Science and Technology, the Ministry of Industry and Information Technology, and the State Administration of Financial Supervision have jointly formulated a "special financial guarantee plan to support scientific and technological innovation.”

The authorities also hope to promote government financing guarantees to increase support for scientific and technological innovation, and increase risk sharing and compensation provided by national financial guarantee funds when it comes to innovative tech-sector SMEs.

According to the Communist Party's People's Daily, the goal of the central government is to "drive even more financial resources towards the field of science and tech innovation."