How many trillions are enough to appease the market?
What to expect from the upcoming Ministry of Finance press conference
[This was a special post sent to paying members of Baiguan yesterday, one day before the highly anticipated Ministry of Finance press conference. In the article, we made accurate predictions for what to expect from this conference. The post is made available for all subscribers today]
As I finished writing the piece about the NDRC presser, it was announced that the Minister of Finance, 蓝佛安 Lan Fo’an would hold another press conference this upcoming Saturday, on Oct 12. The choice of date is convenient. Despite it being a Saturday, it is also a workday (because of the much-hated tiaoxiu system), so this won’t be perceived as “too urgent” to warrant a weekend 996. Yet at the same time, it is also not a trading day, conveniently avoiding immediate market reactions that plagued the NDRC presser.
Now, compared with NDRC, Minister Lan is obviously in a better position to explain anything related to any fiscal stimulus policy. So will the “2 trillion” or “4 trillion” or “10 trillion” be announced on Saturday to soothe the market?
I don’t think it’s likely. The Minister of Finance does not have the power to unilaterally make changes to the budget without approval from the National People’s Congress (NPC). If it’s really an “X trillion” thing that will be announced, the most appropriate choice of this speaker should be the Premier or even one Vice Premier. For instance, the famed “4 trillion” package of 2008 was passed in a State Council Executive Meeting chaired by then-Premier Wen Jiabao and attended by all Vice Premiers and State Councillors. It was widely known that Premier Wen was mostly responsible for deciding on that program. Does the Minister of Finance have the power to set the agenda for this level of decision-making? Certainly not.
But, what I want to stress here, is that numbers don’t matter anymore. In fact, we probably shouldn’t have turned this into a game about some magic number in the first place. In the frenzy of the last 2-3 weeks, we got carried away from what truly matters.
What truly matters is not the sheer number, but whether the market can have a positive and stable expectation about the future.
If you think about it, the core reason that the Sep 24 press conference was a huge success while the Oct 8 one was an utter failure was not because of some numbers per se, but the way that it’s delivered. In the Sep 24 presser, Pan Gongsheng's press release was excellent in laying out a positive outlook. Pan's words "we can have 500 billion after 500 billion after 500 billion", alone, jolted the markets into new highs. But in fact, the first 500 billion SFISF was not there up until yesterday (Oct 10). That's the power of a good story. In the Chinese-speaking world people often talk about “情绪价值emotional value”. Sometimes, emotional value is way more important than facts.
I am seeing more and more voices coming out aiming to re-take the initiative around expectation management.
For example, Mufeng is one of those WeChat bloggers whom I respect the most. He writes about public policy affairs and I know some people in the decision-formulating circles also read his work. He also weighed in on this topic with a highly sensible approach (translation by Claude 3.5 and Baiguan):
If our goal is to secure commitments for a certain amount of fiscal measure, whether it's 5 trillion or 10 trillion, it will immediately get reflected in the capital markets, turning into short-term trades. After a boom comes a bust; this is the nature of the capital markets.
So how should we determine our goals? It shouldn't be based on the specific amount of fiscal measure. Although the market has various estimates for this amount, the government shouldn't commit to a specific figure; otherwise, it will lead to short-term behaviors.
A mature and prudent approach is to dig deep and set clear indicators such as employment rate, inflation rate, GDP growth rate, and social security index. These target indicators must be very clear and consistently reiterated. Today's new retail investors are all college graduates, and they can understand this completely. In terms of monetary policy and operations, there should be ample flexibility; in fiscal policy, it should be clear that the goals for fiscal measures will be announced and implemented in batches. For the supply side, this mainly concerns construction projects, while for the demand side, it primarily relates investments for livelihood and social security.
It should also be clearly stated that as long as the core indicators mentioned above are not met, fiscal policy will continue to be announced and implemented in batches.
It is obvious to whom Mufeng was writing and who may be reading. I am hoping this intended audience has got the message.
And maybe they already have.
An article by an official-turned-scholar, Professor Dong Yu, has been widely circulated in the last 24 hours:
We should not only look at the numbers when evaluating policies. Some policies can be quantified, while others cannot. The phrase “X trillions” is vivid and appealing; people wish it could be even higher. However, such policies have specific applicable scopes, and it’s not feasible to only present numerical data at every press conference because economic policy is not just a numbers game.
There is a type of commentary that seeks to hijack public opinions—first deliberately using numbers to build anticipation, then frequently stating that the outcomes are “below expectations.” This is actually a tactic that works in conjunction with short sellers, manipulating market emotions to profit from the fluctuations. It is important to recognize this.
Of course, policymakers must also consider market sentiment and adopt the perspective of the “政策需求方customers of the policy” to determine the intensity, timing, and steps of policy implementation. We believe that the incremental measures will certainly include new investments, and “X trillions” will indeed be part of it. However, some of these may still need to go through legal procedures, so everyone should exercise a bit of patience and not be easily swayed by those hijackers.
In China, there is a tradition for academics to act as a zuiti (“mouth substitute”, or a spokesperson for someone else) for the authorities. So this article is quite noteworthy. If we assume the very likely scenario that Prof. Dong is indeed a zuiti for the power that be, then we can already draw the following conclusions about the presser tomorrow.
There is not going to be a single number, “X trillion” number, but some numbers will be there, and some numbers will take some time to be determined.
Authorities will seek to regain the narratives-setting power.
Market sentiment (the so-called “customers of the policy”) will be listened to and accounted for. (This is in line with what I wrote in the last piece, where I claimed that market sentiment would be increasingly added to policy calculus.)
There will likely be a lay-out of future and potential policy tools.
With this piece of information cleared, the only remaining question will be whether Minister Lan, the person, would deliver it well.
Yes, we have entered a stage when the skills and personalities of our minister-level officials actually matter now, since they are more frequently paraded for our markets to see. For example, there is a widely shared photo of Pan’s interaction with reporters after the official presser was over on Sep 24. It’s quite an imagery. I have to say that’s the right posture for effective communication, not some high-ranking bureaucrat sitting on a hilltop pontificating about what’s so good about certain Director Zheng’s fabulous speech, but facing the market himself, at point-blank range, honest but undaunted.
Personally, I would prefer the Premier Zhu Rongji years, when a fearless but candid man-in-charge can come out himself to explain things in plain words. I fretted in our community that had we had such kind of person in charge, we would save ourselves a lot of headaches. But this will be a topic for another day.
So, will Minister Lan do a better job at communicating? Lan is a pretty new face on the national stage, I know very little about him. But given that, 1) He is a career finance guy, so presumably he will be quite an expert in his own trade and 2) in some video of his earlier speeches, he looked slick, it is possible that on a personal level, he could at least deliver something better than Director Zheng.
The stakes are high, and I trust Minister Lan must have known it and will do some good prep tonight.