A recent report by Shenwan Hongyuan Securities (SWHY) delves into the dynamics between policy initiatives and the evolving macroeconomic model, shedding light on the disconnect between market expectations and long-term strategic planning. This mismatch, SWHY argues, contributes significantly to market fragility.
Policy and the New Macro Model
SWHY observes that while some investors yearn for immediate, potent stimuli to jumpstart the economy and directly mitigate risks, policymakers must consider the broader picture and plan for the future. This misalignment sets the stage for market vulnerabilities.
The Dual Economic Circles
The report ponders the reshaped global economic landscape, marked by the emergence of dual economic cycles. On one side, the US-led cycle displays a Phillips Curve equilibrium characterized by high inflation, employment, and economic vibrancy. The report acknowledges that while US domestic manufacturing shows signs of life, its competitiveness on the global stage remains nascent due to high costs and prices.
Conversely, the China-led cycle is defined by robust supply capabilities, influenced by both structural trade protection trends and cyclical peaks in capital expenditures. This surplus suppresses prices and strains the domestic loop, limiting the efficacy of policy interventions. Despite challenges, China’s external competitiveness shines, leveraging trade policies to navigate protected markets and demonstrating resilience in neutral-trade zones.
Navigating the New Economy
Against this backdrop, SWHY notes that policymakers face the quandary of stimulating the domestic cycle without solid levers. Fiscal multipliers for consumption stimulation appear weak, and property and local government debt carry significant risk management burdens. Consequently, domestic policies lean towards risk containment, with limited upward elasticity for stimulative measures.
The report underscores the necessity of avoiding new risks in the process of managing existing ones. While market forces should play a central role in resource allocation, safeguards against market failures are indispensable. An improvement in the domestic cycle, SWHY posits, hinges on the stabilization of the external one.
Policy Response and Market Dynamics
SWHY reflects on the alignment of policy frameworks outlined in the Third Plenum and Politburo meetings with the current economic climate. Successive policy designs reinforce the market’s understanding of the new economic paradigm, albeit with limited impact on market sentiment. Investors’ craving for swift, effective economic boosts contrasts starkly with the comprehensive yet cautious approach of policymakers, a dichotomy that exacerbates market fragility.
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