Why China's big stimulus may have run aground already

Ren Zeping says China's private businesses still face a risk-fraught regulatory environment

Prominent Chinese economist Ren Zeping (任泽平) says the latest round of monetary and fiscal stimulus measures unleashed by Beijing may have fallen short of the desired outcome, due to failure to effectively implement policies outlined by the central government.

In a recent online opinion piece Ren, chief economist at Zhongyuan Bank, writes that despite the "first round of economic stimulus being of such considerable size....economic data has only seen slight improvements."

"The outlook of managers on the real estate market has recently started to see on-month declines, the share market has recently weakened following its previous large-scale rise, and private enterprise continues to adopt a wait-and-see attitude," Ren wrote.

"This is a divergence from the massive scale of the first round of fiscal stimulus."

Policy implementation remains the issue

Ren argues that the problem lies in the inability to properly execute many of the stimulus policies as originally intended, thwarting their effectiveness despite their scale and ambition.

"While the stimulus has had definite positive effects, many regional surveys have found that the policies have been hard to implement in spite of their considerable size," Ren wrote.

According to Ren, problems have arisen with regard to the implementation of both fiscal and monetary policy plans.

Chinese households still reluctant to spend

The Chinese government has offered generous subsidies for household white good purchases, as well as a cash for clunkers program intended to drive auto consumption,

Ren points out, however, that average household hit by the property slump or in the midst of balance sheet repair are still leery of needless spending.

"At present many households are cautious in their spending, and if they don't need to swap things out for something new, then they won't," Ren writes.

Central bank’s social housing loans don’t make business sense

In a bid to jump start China’s economy by restoring the vigour of the property sector, the Chinese central bank is providing 300 billion yuan in short-term social housing re-loans at a rate of 1.75%, to fund the purchase by local state-owned enterprises of commercial housing for conversion into social housing.

Ren argues that the terms for the loans are too short, while the rates are too high, making them an unprofitable proposition for SOEs.

"This doesn't make economic sense for local government," Ren writes. "It doesn't cover costs and isn't proactive.

"Even if the social housing reloans were for terms of more than a decade and the rates were under 1%, these are still projects for improving livelihood and not commercial undertakings."

Commercial banks loath to lend to real estate companies

Chinese authorities have overseen the creation of a "white list" of real estate enterprises qualifying for preferential loans from state-owned banks.

Ren points out that while the sums outlined by the policy are considerable, given the state of the Chinese property sector, many banks are still concerned about non-performing loans that could arise under the lending program.

Chinese banks are also concerned over whether it may be more difficult for them to recoup losses, given the uncertain nature of the details surrounding the policy.

"Without clear and certain terms, the banks are not being proactive," Ren wrote. "This problem has already continued for two years - the thunder is loud but the rain is small."

Local government debt still burdensome

While Beijing has expressed firm determination to tackle the risk created by China's highly leveraged local governments, Ren notes that its current program involves the issuance of only six trillion yuan in new bonds for the conversion of their existing debts.

"This is only two trillion yuan of debt conversion each year over the next three years," Ren wrote.

He further notes that unresolved burden of this heavy debt constrains the ability of China's local government to drive growth through fiscal stimulus at the regional level.

"Local government debt pressure is very large, and their budgets are very tight," Ren writes.

"If we want to rely on them to push economic growth in future, why not complete debt conversion in under a year, so that local governments have a free hand to drive the economy."

A risk-fraught environment for private enterprise

While China's top policymakers have long been adamant in their support for private enterprise, players in the non-state sector continue to face major risk in the form of regulatory uncertainty at the local level.

Beijing has sought to deal with this problem with the recent release of the draft version of the "Private Economy Encouragement Law" (《民营经济促进法（草案征求意见稿）》) for solicitation of opinions from the public.

The law addresses the challenges faced by private enterprise in China from fickle or even hostile local authorities, by "further standardising irregular implementation of the law, interference in economic disputes, irregular revenues from confiscations and fines, and payments in arrears."

According to Ren, the measures outlined by the law are urgently needed to improve a risk-fraught commercial environment for private enterprises in China.

"The reality is that some local governments have continued to increase their revenue from confiscations and fines, and entrepreneurs continue to suffer from a lack of security."

Ren calls for greater public reporting of local governments who have abused their powers to increase revenues or illegally seize private assets, pointing in particular to a corruption case involving members of law enforcement the affluent coastal provinces of Zhejiang and Jiangsu province in June 2023.

Trump's tariff threat make effective Chinese stimulus imperative

Ren says the need to improve the effectiveness of China's stimulus measures is especially imperative at present, given the negative impacts of tariffs that the incoming Trump administration is very likely to implement.

"The difficulty of implementing (stimulus policies) is due to an excess of the aforementioned conditions, and they should be removed as quickly as possible," Ren wrote.

"This is especially the case considering the risk of an increase in tariffs from Trump at the start of next year...we need to make preparations in advance."