China’s shadow stimulus

CHINA ADVISORY - Report 10 Feb 2022 by Andrew Collier

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Many analysts are predicting a large economic stimulus in 2022, in the form of lower interest rates, further cuts in the reserve requirement ratio (RRR), an expansion of monetary policy, or other means. However, Beijing is so far holding off on a major stimulus program. There is a consistent worry within the government that inflating the property bubble could result in a financial crisis and the collapse of the Party. There is no sign of a major relaxation of liquidity conditions.

However, we are seeing indirect ways of partial economic support – what I call a “shadow stimulus.” This is occurring through local governments, local banks, and Local Government Financing Vehicles (LGFVs). This allows the central government to avoid increasing official government debt, while the PBOC and state banks keep their balance sheets clean. The stimulus is pushed down to lower levels, where the messy politics of excess leverage, default, and unemployment can be fought – town by town. This is more of a band-aid than a new infusion of capital. The question is – how much leverage will be added, how transparent will it be, and what degree of slower growth (and unemployment) can be tolerated? The takeaway is that Beijing is willing to let some provinces become weaker while others thrive. It’s a political solution to an economic problem.