How China can rescue itself and restore confidence, according to a UBS economist

• China can repair its economy, but it requires political will, UBS' Tao Wang wrote in the FT.
• Beijing will have to provide credit to its ailing property market, and boost stimulus to encourage spending.
• Lowering interest rates is crucial, and fears of a yuan depreciation are overdone.

China has the ability to reverse its economic misfortunes, but its success hinges on coordination and timely action, UBS' Tao Wang wrote in the Financial Times. 

Market confidence can rebound if Beijing is less hesitant about implementing solutions, specifically those targeting its spanning property sector and domestic consumption.  

"While using national funds to buy blue-chip stocks might support equity markets in the short term, what is really needed are measures to revive the economy, raise corporate earnings and restore business and household spending," the chief China economist said. "Next week's National People's Congress would be a good time to announce such measures."

China's economy has stumbled since pandemic restrictions were lifted in late 2022. A string of defaults has battered the country's massive real estate sector, while growth has slowed as deflation and unemployment take their toll. 

These conditions are a central reason why foreign investors have withdrawn from Chinese markets en masse, an exodus made worse by Beijing's tech crackdown. By January, the Shanghai Composite index stood at a five-year low.

To reverse this, Beijing needs to become more comfortable in providing stimulus and credit support, Wang outlined:

"China's government has the tools at its disposal to overturn the current downturn, but its success will depend on timely action, policy co-ordination and political will."

A government-led debt restructuring effort would limit any damage, while structural changes could slowly introduce a new growth model that leans less on debt investment and more on innovation and consumption.

Spending would be encouraged if authorities introduce a stimulus of at least 2% of GDP to subside consumption, encourage spending, and finance infrastructure investments. So far, Beijing has withheld major stimulus, since it goes against the leadership's ideology, analysts have said.

But Beijing could avoid direct subsidies by structurally increasing healthcare spending, which would support household consumption. Meanwhile, doing away with household registration rules would encourage labor mobility and boost housing demand.

Looser monetary policy is also part of the equation, Wang added: "Further interest rate cuts and liquidity injections would help lower the mortgage and corporate debt service burden and, together with looser credit policies, drive credit demand."

While the country has lowered interest rates in 2023, authorities have been uneasy about deeper cuts. Lower rates would depreciate the yuan, some fear, but this risk would diminish alongside an economic support package, Wang said. 

"The benefit of rate cuts is likely to far outweigh the negative impact of modestly widening the US-China rate gap," she noted.