Macro views
Macro views

China policy stimulus: Muddling through

Quick takes on capital markets

August 18, 2022 | 2 min read

China’s economic headwinds justify further policy stimulus. Yet, the politburo (China’s top decision-making body) meeting held in late July has poured cold water on the extent of potential stimulus, suggesting a “bazooka” type of stimulus, of a level comparable to previous cycles, is not forthcoming.

China Credit Impulse Index
Level, 2005-present

China credit impulse index from 2005 to present

Bloomberg, Principal Global Investors. Data as of June 30, 2022. The China Credit Impulse Index measures the credit cycle in a market. A rising level indicates the economy is recovering.

COVID related lockdowns ravaged the Chinese economy earlier this year, and markets have been eagerly waiting for China’s policymakers to introduce new stimulus measures to support a recovery. While the recent rate cut, despite growing inflation worries, confirms that the People’s Bank of China is concerned about the growth outlook and recognizes the need for stimulus, government action suggests less urgency on their part—at least for now.

China’s policymakers had been quite active during Q2, including re-filling government buffers to fund infrastructure investment and tax cuts. Nonetheless, weak Q2 growth, uncomfortably high unemployment, and disappointing July retail sales and industrial production data suggest that such moves are still inadequate.

And yet, the recent politburo (China’s top decision-making body) meeting indicated that the government, rather than introducing new measures to combat economic weakness, has instead moved its focus towards implementing existing stimulus policies.

Existing stimulus could keep economic activity afloat in Q3. But the waning fiscal impulse implies that, without additional stimulus measures, the economic recovery could be derailed in Q4. As that becomes apparent, the government is likely to review its decision.

Investors may be disappointed that a “bazooka” type of stimulus, of a level comparable to previous cycles, is not forthcoming. Yet, China’s monetary and fiscal policies are still tilted to the dovish side, putting China on a favorable policy path compared to most of its global peers.

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