Richard Koo (economist on balance sheet recession) noted that
- China is in balance sheet recession. But it is in difficult position, as its 2022 govt budget deficit was 7%, before the balance sheet recession. So the govt may not be willing to roll out big stimulus. (link)
- To fend off the balance sheet recession, China govt should borrow more, as there is no borrower besides govt in balance sheet recession. A committee comprising of smart people should be set up to identify good projects for Govt to spend on. (link)
- Good projects are those with sustainable social returns more than the cost of capital. As the returns are sustainable, the money spent on such projects will not be wasted
- Cost of capital refers to long-term govt bond yield which is 2.4%.
- The projects need not be infrastructure project. For example, for Spain, a project to teach english to their tour guides could be worthwhile, as this will help their tourism.
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China 2Q 2024 GDP is 4.7%. Its Jun retail sales growth is weakening at 2% growth.
- Luxery brands noted abysmal sale growth in China in 2Q 2024.
- Chow Tai Fook Jewellery Group has 20% decline in sales in 2Q 2024.
- Jiumaojiu announced profit warning for 6 months ending Jun 2024. (Jiumaojiu operates Tai-er, Song Hot Pot restaurants)
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China is rolling out measures:
Monetary measures
Cut 1-yr MLF by 20bps to 2.5%. Cut 1-yr and 5-yr LPR by 10bps. https://x.com/Sino_Market/status/1816284949072191699
Fiscal Measures
$300b rmb special bond fund for trade-in program, lower requirements. https://x.com/Sino_Market/status/1816376732565528745
SOE investing 3 trillion yuan over next 5 years to upgrade equipment and renovations. https://x.com/Sino_Market/status/1816676718872264828
I guess that China will not roll out any large stimulus for consumer consumption, as it could be too wasteful given their budget constraint.
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