Some good material at FTAlphaville today on China’s latest stimulus efforts, first from Deutsche:
Here is the context why we take LGFV financing seriously. China’s weak economic performance in 2015 is to a large extent driven by a fiscal shock… Fiscal policy has been rather tight, with total government spending growth falling to -0.2% yoy in Q1 from 6.4% yoy in 2014 (including central and local, budgetary and government funds). Moreover, the government tightened control on LGFV financing by issuing the “Document 43″ in late 2014. LGFVs are responsible for most of the infrastructure investments, which account for 20% of the total investment in China. The crackdown on LGFV financing contributed to a fiscal contraction in Q1.
In this context, loosening control on LGFV financing makes a big difference. It helps to boost investment more effectively than a rate or RRR cut. Monetary policy easing can help with credit supply, but does not help with demand effectively, particularly when fiscal policy is tight, as private demand for credit is weak. A combination of loose fiscal and monetary policy, on the other hand, can be much more effective in boosting investment, as it helps both credit demand and supply.
