So China’s economy continues to slow. And it almost goes without saying that the country’s policymakers must be under increasing pressure to do something—anything—to get it growing again. Or not. Reading between the lines of the State Council’s interim report on economic performance in the first half of 2016, economists on Credit Suisse’s Global Markets team discerned a level of satisfaction about the economy that probably makes new fiscal stimulus unlikely any time soon. Specifically, the report points out that the government has stabilized GDP growth, reduced the decline in producer prices, and sustained employment growth. Further down the road, the Bank’s economists expect future fiscal policy to focus on reversing the slide in private investment and swapping corporate debt for equity to resolve non-performing bank loans. Of course, pulling either one of those two off will be a tall order.While Premier Li Keqiang has long advocated removing obstacles to private businesses, including allowing them to compete with state-owned enterprises (SOEs) on a more level playing field, the government has also expressed a contradictory desire to merge and strengthen SOEs and use them to advance China’s global position in certain industries. Li has also encouraged the development of public-private partnerships (PPPs), but regulatory uncertainty continues to discourage private players from making large, multi-year financial commitments. Meanwhile, swapping debt for equity is challenging because Chinese law currently restricts banks from owning corporate stock and even imposes punitive capital charges on those that do.
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