Beijing’s Second Pivot: ‘Twin Bazooka’ Stimulus Deployed and Boom!!! China Is Up 25%

In the last week, Beijing announced a massive monetary stimulus policy and then immediately followed up with a comparably gargantuan fiscal stimulus policy. The “twin bazookas,” which economists and investors have been clamoring for, have finally been deployed. Until last week, Beijing’s response to its sputtering economy and rising unemployment had been steadily incremental.

Beijing was not unaware of the problems of slowing growth and negative sentiment. It was staring at its worst fear—Japanification. For decades, Chinese policymakers’ one constant paranoia has been the bursting of its real estate bubble, leading to an undoing of its economic growth miracle.

However, until last week, Beijing was confident it could micromanage through a steady flow of incremental measures to stem the collapse of consumer and investor confidence, turn the tide, and rekindle growth. Occasional 10-basis-point cuts on various policy rates and favorable industry policies here and there have all failed to elicit more than a “blah” and “meh” from domestic and international investors.

A bear market that began in February 2021 and has lasted more than three years tells the story. The China CSI 300 Index, essentially the Chinese S&P 500, has declined 47% since its peak. Corporate earnings have surprisingly held up robustly, while dividend yields rose precipitously to an average of 4.5% and P/E ratios have fallen as low as 6x for many big blue-chip stocks. The basic market fundamentals did not convey disaster. All economies go through boom-and-bust cycles, and these weak EPS growth numbers were consistent with a bad bout of recession. It was not a case of spectacular earnings wipeout associated with bubbles, fraud, and collapse, as seen during the Japan Inc. bubble or the Global Financial Crisis. The problem was a total collapse in domestic and global confidence. The prophecy of Japanification weighed crushingly on everyone’s mind.

Xi thought he could be the hero. He was going to be the man who deflates the unhealthy and unproductive real estate bubble that his predecessors wouldn’t dare touch—and perhaps even fueled to get easy growth wins. He expected to take some pain but clearly underestimated the domino effect. Stubbornly, Xi has ignored financial market sentiment. It was easy for him to label the Chinese stock market as a casino for gamblers and international hot money, which didn’t matter and never contributed to real economic growth. Even when consumption growth stalled and then contracted, Xi was able to rationalize that excessive saving resulting from a natural disaster like COVID was part of Chinese culture—and isn’t saving how one gets wealthier and creates future prosperity?

But, rising unemployment and the associated rise in disappointment—even cynicism—regarding Xi’s focus on the economy finally woke him up. A new narrative was taking hold. It was no longer one where Xi was fixing the hard economic problems created by decades of Wild West growth and, thus, the Chinese people must keep faith and endure some pain together. Instead, the emerging cynical view was that Xi doesn’t care about or understand the economy and was undoing decades of economic progress started by Deng Xiaoping—that he is actually a Marxist ideologue bent on dismantling capitalism. (Argentina’s Javier Milei may soon face a similar narrative crisis if unemployment continues to rise as a result of his reforms. Popularity can only take you so far, and it can turn against a charismatic leader who asks for sacrifices, with a vengeance.)

That emergent narrative was a gut punch to Xi that finally shook him. He underestimated what Adam Smith warned about so eloquently—the animal spirit. But he gets it now. Overnight, Beijing performed a complete 180. Since then, rapid-fire stimulus plans have surprised the market. First, a 50-basis-point cut signaling more will come. A 1 trillion yuan credit injection through quantitative easing was followed immediately with a 2 trillion yuan fiscal spending package. Real estate financing, which had previously been shut off to deflate the bubble, is back—with lower down payments, easier approvals, and more subsidies for new buyers. The prohibition on buying a second home has been completely removed. Additionally, a 300 billion yuan government loan program for firms has been initiated to buy back cheap company shares, along with voucher programs to subsidize the upgrading of home appliances for households.

Investors and media have been pinging me all weekend with the million-dollar question: What happened in Beijing?

It is understandable to doubt the reform from a man, whom we have come to demonize as ideological and incompetent. The Japanification prophecy is so compelling. And the uber ambitious Chinese leader in Xi, who has his sight set on rivaling the United States—casting him as the “ONE” to bring the undoing of China is so dramatically perfect.

My advice: Don’t get suckered into the narrative that Xi is an insane ideologue hell-bent on destroying China out of personal hubris. He really isn’t some special evil character; he is just as stubborn yet ultimately results driven as most CEOs. He wants to stay in power, and that means managing China Inc. well. Managing well involves full employment, robust GDP growth, and positive grassroots social sentiment.

Xi didn’t get this far—outflanking every other deft operator and party power player—by being unintelligent, inflexible, and unable to pivot in a timely manner.

Recall when his zero-COVID policy, after its initial success, ultimately proved flawed. When the narrative shifted from “we must sacrifice to help solve a national health care crisis” to “Xi is an out-of-touch authoritarian and the lockdown is unscientific,” Xi swiftly pivoted with an immediate reopening. Overnight, China’s new policy began to view COVID as just a severe common cold.

The same has just happened with Beijing’s economic policy.

Xi’s policy of ignoring and even restraining what he thought were unproductive sectors—such as the stock and real estate markets—in order to focus more directly on manufacturing and healthcare clearly wasn’t working. He has finally realized that capitalism needs intermediary markets (like the stock market) to function. As imperfect and flawed as the Chinese A-shares market might be today, domestic and global investors associate having a vibrant stock market with the government’s commitment to a well-functioning capitalistic and competitive economy. Xi has likely come to accept that Chinese households have an (irrational) attachment to buying empty apartments as stores of value. Yes, building apartments as a way of manufacturing “hard currency” is expensive and unproductive—much like mining bitcoins (which Xi outlawed a few years back)—but that cat is long out of the bag. Government policy to deflate home prices is no different from policies that erode currency value. People will be up in arms when their store of wealth is purposely depreciated by the government.

Growth-oriented and forward-looking industry policies were useless for building national confidence when the government was also seen as rolling back support for capitalism and aggressively eroding people’s store of wealth. Beijing was not going to achieve proper consumption and investment to support growth in manufacturing and healthcare unless it relented on its current attitude toward the stock and home prices.

And relent he did.

Beijing is now adopting what the United States has proven over and again: when in doubt, bring out the twin bazookas: Print money and spend money.

How well will this work? It was effective last time in China under Hu, driving one of the biggest bull markets and creating a spectacular stock market bubble. Of course, as we all know, it has worked repeatedly for the United States.

Judging from the 26% rally since the monetary and fiscal bazookas have been fired, the market is buying it!

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