Credit Suisse today offers an assessment of 2014 China that is pretty reasonable:
We revise 1Q14 growth forecast to 6.0% QoQ from 6.6%, and to 7.3% from 7.7% in YoY terms. We expect Beijing to take action to boost growth eventually, but the threshold for stimulus is likely to be higher.
We believe that Beijing’s bottom line for growth is at 7% in YoY terms.
It prefers not to adopt government intervention and not to use local government spending as the tools to boost growth. We think President Xi is keen to focus on reforms even at the expense of slower growth, provided the slowdown does not derail social stability. As such, if the economy softens as we have projected and Beijing leaders confirm the slowdown in April when March statistics and more feedback become available, stimulus probably will be on the agenda in May, at the earliest. This would be consistent with the pattern of growth/policy easing in 2011, 2012 and 2013. In each year, growth outlook seemed fine, so the authorities tightened liquidity. The growth slowdown became obvious in early 2Q, forcing the government to ease during the summer time. Total social financing rebounded, followed by growth rebound. We expect a similar time line this year, but a smaller dose of stimulus, hence a more modest rebound in growth in 2H14.
If Beijing launches stimulus, we expect spending to be focused on environmental protection funded by the central government, versus infrastructure investment under Wen Jiabao’s administration. (1) The current government is cautious about allowing local governments another debt-based spending spree. (2) Environmental issues have deteriorated sharply over the past year. The PBoC may conduct tactical monetary easing to accommodate the stimulus, but we think it unlikely that the tightening cycle begun June last year will be reversed.
Hard landing risk is low debt issues surface in 2H14
(1) Beijing has the fiscal strength and political will to stabilise the economy. Stimulus is not the preferred tool to address structural issues, but the new leaders will use it if necessary for social stability.
(2) Housing sector is still robust. (3) Consumption has softened, but overall volumes are not low. (4) Funding costs went up, but the size of social financing remains strong. In our view, there should be more risks during 2H14 when the local debt repayment enters the peak season. Trust funds, which are primary lenders to the local governments during 2011-13, need Rmb2.3 tn to unwind positions and return money to investors during that period. We expect some defaults. It would be up to Beijing to decide whether or not to rescue.Given the central government’s prevailing sentiment of “teaching the local governments a lesson”, we believe that the risk of Beijing does not stepping in quickly is real. Many shadow banking products have bundled risks through complex structures with low transparency and we are concerned about the potential chain reaction. Please refer to our separate note about reforms and risks.
That’s a solid piece of analysis. It implies a method of managed deceleration that if repeated will see growth likely decelerate again next year, and the year after that, and…
