China's economy is undergoing a structural transition, so don't expect a massive stimulus package, analyst says

• China's economy is transitioning away from previous growth drivers, UBS analyst Tao Wang wrote.
• That means Beijing is unlikely to launch the type of stimulus that earlier downturns saw.

Waning growth in China won't be solved by massive stimulus, as the country's economic challenges are not cyclical hiccups, according to UBS Investment Research economist Tao Wang.

Instead, the government will likely provide modest support for the economy with a muted boost to infrastructure spending, she wrote in The Financial Times.

"Most importantly, I think Beijing's policymakers understand these economic woes are not just cyclical. Large stimuli cannot address deep-rooted structural issues," Wang said. "Willingly or not, China is transitioning away from growth led by property and local government, which is a painful process."

After a first-quarter bounce, Chinese growth has increasingly dragged as industrial output, retail sales, investment and exports all slowed sharply.

To stimulate economic activity, China's central bank recently cut interest rates, while government officials are discussing plans for infrastructure stimulus and a loosening of property market restrictions.

But Beijing is unlikely to launch the type of rescue that earlier downturns saw, as key dynamics have since changed, Wang predicted.

For instance, the current high levels of debt limit how much more spending governments can provide, she noted, while existing obligations like pensions and healthcare weigh more heavily.

Meanwhile, the housing sector is suffering from weak demand, as home ownership has already reached 80% in 2020 and the population is declining.

And with corporate and household confidence low, demand for credit is also low, so any monetary expansion may simply go towards local government spending that fuels an already unsustainable model.

Instead of a spending binge, Wang said that China should implement modest stimulus as well as policies aimed at structural issues.

"These could include reducing entry barriers and enhancing legal protection for the private sector; a well-publicized increase in healthcare and social protection spending; and deepening hukou (household registration) reforms to increase labor mobility and rural migrants' spending power," she wrote.

In the long term, stepping away from large government support may be beneficial to the country's economy, she added. That's as it could clear inefficient market participants, allow development in the private sector, and enable more social spending.

"Such a realignment of the roles of the state and the market would be welcome," Wang wrote.