From Citi:
Cyclical Policy Not Lessening Property-Sector Drag; Trimming Growth Forecasts
- Distinguishing between cyclical easing and stimulus – The property sector correction has complicated Chinese authorities’ efforts to balance between growth and reform. Policy choices are tied up to both quantitative and qualitative targets. Cyclical easing which is necessary to smooth out growth is perceived as stimulus by policy-makers, and thus avoided. The Aug data suggests that targeted easing is unable to even partially neutralize the property drag, and if it continues, may result in a back-loaded stimulus. We cut our GDP growth forecasts to 7.3% this year (from 7.5%) and 6.9% next year (from 7.1%) to reflect the policy reluctance, and now expect three policy rate cuts from now into 1H15.
- Property dag: Immediate and tail risks – We maintain our call of a soft landing in the property sector, but its negative impact on investment growth looks imminent and lasting. A 10% correction in property/construction investment growth may result in around 1.75-3.2ppts slowdown in GDP growth, assuming all else equal. GDP growth could decelerate to 6-6.5% this year if the property-sector drag is unsterilized. The lagging spillover into the production chain could bring more downside risk in 4Q14 and 1H15.
- Revising down GDP growth forecasts – The Jul-Aug data has confirmed that the June trend was an outlier. The lack of timely and broad-based cyclical easing undermined market expectations and failed to offset the property slowdown. As the positive impact of targeted easing, including investment in slum rehabilitation, tapers off, property headwinds may further weigh on GDP growth.
- Policy rate cuts expected this year – We expect authorities to step up cyclical easing to aim at partially neutralizing the property drag and defending a lower but more reasonable level of growth next year. Only timely cyclical action can avoid future stimulus, in our view. China policymakers may proceed first with targeted RRR and policy rate cuts near term and invest out of the property sector slowdown, latterly including more investment in energy, healthcare and environmental protection. Broad-based RRR cuts and policy rate cuts look inevitable, but we think rate cuts are more urgent to avoid a growth slump in early-2015.
- Growth target to be adjusted downward next year – In our view, beating a lower growth target is better than missing a higher target, and we believe the growth target should be cut to 6-7% in coming years to factor in the double downturns, property and reform, during the transition in the next 2-4 years. But we think Chinese policymakers are more likely to set around 7% as the new growth target, which is unlikely to be self-sustained without policy intervention.
I agree with the growth impacts but not the solution. China does not want to ease credit and will only do so in an outright emergency. Rather, we’ll see more of what we’ve already seen, targeted measures that accelerate and fund stimulus to offset the property bust. It is not an accident complicating policy, it is the point of policy.
From MNI via Forexlive we have more on the overnight injection of cash into banks:
- Each bank will receive CNY100 billion
- Interbank liquidity is set to tighten up next week because of a new wave of IPOs, expected to freeze around CNY1 trillion in subscription funds
- The week-long National Day holiday plus end-of-quarter effect is also going to make next week the hardest this month for banks to get money
- One source notes that the “SLF is not something new and it’s part of the PBOC’s monetary policy tools,” with the CNY500 bln equating to a RRR cut of just “above 50bp.”
- The source also notes that the “RMB500 bln is only for 3-months and is the preferred targeted strategy of the PBOC instead of all-out RRR cut,” with a chance that the PBOC may engage in a “rolling” SLF.
- The source also adds that current liquidity conditions in China are “not tight,” with 1-week Shibor and 7-day repo at 3.25%, 3.45% respectively and the recent IPO impact on liquidity has been “mild.”
- The move however could be a “deliberate signal to push 7-day repo below 3%,” with downside pressure to remain on China IRS.
This is clearly an easing of sorts. The question is what sort? Banks are seeing deposit and hot money outflows so this ensures they don’t stop lending. At the same time, prudential controls around various sectors remain tight and markets themselves (demand) do not seem overly enthused about more credit (especially housing).
Nothing done with monetary policy so far has turned the slowing trend. I expect that to continue and fiscal to pick up the slack (some of it monetarily funded) but we shall see.
