Three weeks have passed since China unleashed a
bevy of stimulus measures that triggered
a fierce rally in stock markets. The package raised expectations that Beijing is willing to take more forceful action to staunch the crisis in the housing market and stimulate consumption, the parts of China’s policy response that have disappointed investors the most.
Yet no sooner did Chinese equities enter a bull market than doubts
began to set in about the size, composition and effectiveness of the programme, fuelling concerns about another false dawn. That the jury is still out on the package is a sign of the acute challenges facing Beijing in convincing investors that it has a credible plan to revive the economy.
Part of the problem is the presentation and communication of the measures. When they were announced in the last week of September, investors
were taken aback by policymakers’ sense of urgency and change in approach. The combination of a multipronged effort and “shock and awe” tactics convinced many that a major policy shift had occurred even though details of the closely watched fiscal component were scarce.
Since then, however, policymakers have been a textbook case of how not to turn around sentiment. In times of crisis, governments and central banks need to speak with one voice, announce concrete measures that far exceed market expectations and make it clear they have a laserlike focus on the issues preoccupying investors the most.
Despite showing promise at the end of September, China’s stimulus has failed the credibility test. Markets have no stomach for delay and
conflicting policy signals, especially given Beijing’s track record of ambivalence, hesitancy and gradualism when it comes to
deploying stimulus. If China intends to wield a “big bazooka”, it must fire it with speed and overwhelming force. In the past three weeks, Beijing has done the opposite.
Some investors believe China has missed an opportunity to make a decisive policy shift. UBS said “China talks rather than acts”. Bank of America’s verdict was less damning but just as critical. The bank’s analysts said “shifting public expectations may require an enhanced focus on policy communications, forward guidance to show policy commitment and a more attractive mechanism design to provide the right incentives to economic actors”.
