China’s stock market declined today amid signs that Beijing is preparing a “more powerful” stimulus plan to offset slowing growth and U.S. trade threats. The Shenzhen Composite, the broader benchmark for China’s stock market, posted its biggest single-day loss since Nov. 2017 in early trading, falling 2.1 percent to close at 2,871.94. The Shanghai Composite Index dropped 1.3 percent to finish at 3,132.05, its largest single-day loss since August 2017.
After a two-day “leaders’ meeting” in Beijing, China’s new Communist Party leader Xi Jinping said the government will “further open up more opportunities for the market, and ensure better ecological and environmental conditions and a sustained growth of the private sector.” The Xinhua news agency reported that the central bank also set the largest day-to-day bank liquidity target for Thursday of 21.4 trillion yuan ($3.1 trillion).
While Beijing has promised to avoid major stimulus in the past, the latest remarks from Xi suggest that changes are in the works. The People’s Bank of China has increased the amount of cash that banks can lend and borrowed in recent months to try to get companies to spend more, the Wall Street Journal reported. The proportion of loans that are going to the large state-owned enterprises (SOEs) dropped to 25 percent in April, down from 32 percent the previous year.
Chinese policy makers had been divided on whether stimulus was necessary, given the negative impact that China’s trade disputes with the United States and high debt levels had on the Chinese economy. Then-premier Li Keqiang said earlier this year that the government should not use stimulus as a “payroll stimulus.” On Wednesday, Bloomberg reported that officials in the low- and medium-income industries would be exempted from China’s proposed labor law, a relief for executives and the poor who are not likely to file complaints under the current system.
Still, analysts are not expecting economic growth to recover quickly. The World Bank lowered its 2019 forecast for China to 6.6 percent from 6.8 percent previously, and the Asian Development Bank reduced its growth estimate to 6.5 percent from 6.6 percent. China’s trade surplus narrowed for the fifth month in a row in May, reaching a monthly record $60.9 billion. China imported $12.4 billion in foreign goods, with American exports rising to $9.9 billion.
The trade deficit is high enough to require China to negotiate with the U.S. over it. According to the Financial Times, China may retaliate to any tariffs by considering restrictions on imports of pork, wine, and fresh and dried fruits. Any tax on goods imported by the U.S. will lower investment in China.