China heads to recovery plan, US election in mind

Top officials in China's parliament have been meeting since Monday to hammer out a stimulus plan that analysts say could be further consolidated if Donald Trump wins the U.S. presidential election this week.

Pressured by the situation and by many economists, China has announced several rounds of measures in recent weeks, including rate cuts and the easing of restrictions on home purchases.

After a surge in the stock market fueled by hopes of a major recovery plan, optimism has somewhat fallen back in the face of promises and policies deemed not strong enough by the markets – which were hoping for a large quantified investment.

Will this long-awaited announcement come this week??

Analysts have their eyes glued to the meeting, which opened on Monday, of the “Standing Committee of the National People's Congress”, the highest body of the parliament, headed by Zhao Leji – the number three in the Chinese government.

A residential complex under construction in Huaian, in the province of Jiangsu (east China), on October 17, 2024 © AFP – STRINGER

This standing committee must examine and approve all legislation, including that relating to the budget.

“We expect more details on the proposals that will be adopted,” said Heron Lim, an analyst at Moody's Analytics, including “how this additional funding would be allocated to address short-term economic challenges.”

Nomura economists expect lawmakers to approve a supplementary budget of about 1 trillion yuan ($150 billion) this week, mainly for indebted local governments.

– The Trump effect –

Analysts also expect Beijing to provide a one-off 1 trillion yuan in aid to banks to address the problem of non-performing loans over the past four years.

“A lot of money will go to cover losses,” says Alicia Garcia Herrero of Natixis.

“It won't really be aimed at stimulating growth.”

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The headquarters of the Chinese central bank in Beijing, October 19, 2024 © AFP – ADEK BERRY

Potential concrete measures are expected to be announced after the meeting on Friday. By then, the outcome of the Donald Trump-Kamala Harris race for the White House should be known.

“We believe the outcome of the US election will have some influence on the size of Beijing's stimulus plan,” Ting Lu, Nomura's chief China economist, said in a note.

Riding on anti-China sentiment in the US political class, both candidates have pledged to continue to put pressure on Beijing. Donald Trump has promised to impose 60% tariffs on all Chinese products entering the United States.

Nomura expects China to adjust its stimulus measures based on the election result.

“The size of fiscal stimulus measures (…) could be 10 to 20 percent higher if Trump wins,” writes Ting Lu.

But “the main challenges for Beijing come from within China rather than abroad,” he emphasizes.

– “Bad distribution” –

China is facing sluggish household consumption, a real estate crisis and galloping public debt. All these factors threaten the government's target of a GDP increase of “around 5%” by 2024.

A construction site in Beijing, October 31, 2024 © AFP – WANG Zhao

Long a key growth engine for the Asian giant, real estate is now struggling with developers' high debt.

The average price of new homes rose slightly last month, according to the China Index Academy, after several years of falling.

But many properties are still unfinished or unsold. Their acquisition could cost Beijing up to 3.3 trillion yuan (426 billion euros), according to Natixis estimates.

The situation in the real estate market is weighing on consumer confidence.

“The average Chinese consumer who has a mortgage does not feel that his purchasing power is increasing,” underlines Heron Lim of Moody's Analytics.

The thorny issue of how local governments manage their debt will also be on the agenda at this week's meeting.

But China's economic difficulties are not limited to empty homes and less consumption.

“The economy as a whole is losing momentum productivity due to poor distribution of public money,” notes Alicia Garcia Herrero, particularly in terms of industrial policy and subsidies.

“All of this really needs to be changed,” she emphasizes.

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