Desperately seeking (Chinese) stimulus


The stock market is getting punished today, down 1.5% at the open with a few bargain hunters emerging now.  The major iron ore miners are also looking through the iron ore price recovery to the macro weakness, quite sensibly, with materials and industrials down 1.75%. Banks are down 1.26% too.

But all is not lost. A series of optimists mull Chinese stimulus despite it being ruled out in China. Peter Cai at locked BS seeks hope:

Premier Li shrugged off a question from a CNBC journalist about whether China was able to grow at 7.5 per cent without further stimulus. He told a large gathering of domestic and foreign media that the country was able to grow at 7.7 per cent last year without artificial stimulation and China could do it again this year.

However, he admitted the situation this year was more complicated than last year. While he sounded confident and relaxed about achieving the goal, he was clearly mindful of a multitude of challenges facing China this year, including the prospect of a debt default and the risk of a broader financial contagion.

But the most important hint was what he said about employment. Premier Li said the goal of 7.5 per cent was flexible and the government could tolerate both higher and lower growth rates. However, he said the floor growth rate that was acceptable to Beijing must guarantee sufficient employment as well as income increases.

It must be noted that the Chinese finance minister Lou Jiwei repeatedly emphasised the same point Premier Li made only a few days ago. “It does not matter whether the GDP grows faster than 7.5 per cent or below 7.5 per cent. What it matters is employment,” he said (Should China abandon its growth target?7 March).

Then again, maybe that’s not so hopeful.  Bloomie has more on what level of growth would keep employment sound:

“They are serious about reforms and they are serious about protecting the growth target and particularly the employment part of that,” said Tim Condon, head of Asia research at ING Groep NV inSingapore…The nation could allow growth to sink closer to 6 percent without triggering a destabilizing jump in unemployment, given the country’s declining working-age population and a jump in jobs in labor-intensive service industries, a survey of economists by Bloomberg News showed in August.

The labor market is now undersupplied, according to a job-seekers ratio compiled by the government and based on urban employment markets run by local authorities, Nomura Holdings Inc. economists led by Hong Kong-based Zhang Zhiwei wrote in a Feb. 25 report. There were 110 positions available for every 100 job seekers last quarter, they said.

6%. Crikey! That won’t be good for jobs in China’s southern-most mining province! But wait, there is more, according to  Yao Wei, China economist at Societe Generale:

“This is a very fast deceleration…This is really beyond the tolerance of the Chinese government. As a result, I think they will cut the required reserve ratio quite soon or do some easing.”

In the past, when there have been signs of an economic slowdown early in the year, policy makers have often waited for data to confirm the trend before taking action, partly because of Lunar New Year distortions, Song Yu, a Beijing-based economist with Goldman Sachs Group Inc., wrote in a note yesterday.

“Even though the government seems very much interested in fighting against inefficiency and overcapacity, I think growth still remains the most important objective of economic policy,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc, who formerly worked at the World Bank. “That will influence what the government would do.”

BofAML also sees hope of the stimulus kind:

Based on the Jan-Feb data, we cut our 1Q14 growth forecast to 7.3% from 8.0%, and accordingly we revise down 2014 annual GDP growth forecast to 7.2% from 7.6%. We now expect 7.3%, 7.5%, 7.1% and 7.1% yoy growth from 1Q to 4Q this year after factoring in base effects. Markets could see more aggressive cuts on the Street, but we believe once again there will be over-reactions.

After a potential sell-off, time to look to positive factors
Markets have been quite negative on the Chinese economy in the past months, and will likely respond negatively to today’s weak activity data. But afterwards, markets could perhaps turn to some positive factors.

  • First, with this set of weak readings in Jan-Feb, the room for data to be worse in March and coming months could be limited. Based on some high-frequency data like daily steel production, we have seen some improvement in activity from late February and we expect a turnaround in March data.
  • Second, the Chinese government has already taken some action, evidenced by significantly lower interbank rates and cheaper CNY. After the Lunar New Year (LNY) holiday, we expect Beijing to ramp up spending on infrastructure and social welfare projects including starting 7.0mn units of social housing. We think this time these efforts will be much more real as new leaders consolidate their power. Beijing may introduce some other supportive measures. However, we believe the chance of RRR cuts is still small due to the low interbank rates.
  • Finally, despite the slowdown in Jan-Feb, we don’t think it could be described as a hard-landing, even though some sectors might have seen a slump in growth rates. We should note that data in the first two months are usually relatively volatile. And Beijing has room to adjust policies in the year beginning.

It’s an ignominious business, this, waiting to see if an opaque group of distant communists will bail out our high asset prices again.

Whose idea was it to fashion our economy thus, with a dramatically narrowed and volatile export base without a mining tax nor fiscal stabilisation mechanism like a sovereign wealth fund?

Our economy has become the equivalent of a lonely and desperate single white female!

David Llewellyn-Smith
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  1. General Disarray

    Given past performance you’d have to think they’re likely to stimulate, the question is how large it wll be. My guess, it will be a lot smaller than many expect – designed more to soften the blow.

    But who knows. Grab a bag of popcorn and enjoy the show.

  2. “Our economy has become the equivalent of a lonely and desperate single white female!”

    what an ignorant and condescending comment! single, white women have the highest “happiness” rating in western societies.

    many of us are single by choice and we are a growing and influential force. please bring yourself into the 21st century.

    • Heaven fore fend, I was not saying all single, white women are desperate and lonely! That is to read my words backwards.

      I was referring to the movie and a single white female that is desperate and lonely!

  3. It would be a contradiction for China to on the one hand, dampen speculation by allowing defaults and devalue the Yuan, and on the other hand stimulate.

    Things would have to get very bad before party officials pull the stimulus trigger. I don’t think we’re there yet, but it will come soon if we see more loan defaults and collateral liquidation.

  4. China is not a market economy and should not be expected to behave like one. The political part of the political economy question is primary.

    The apparatus of Chinese government serves the needs of the CCP and its members first. They have levers of control which are difficult for those who have grown up in liberal democracies to appreciate.

    Where the interests of the CCP dictate that stimulus (whether hidden or transparent) is required then stimulus will be delivered. Especially when their retention of control and power relies on it.

    Don’t expect China to collapse yet. Remember that the Soviet Union survived almost 2 decades of stagnation after its own FAI boom in the 50s/60s.

    • Who is saying China is going to collapse? Nobody.

      Actually, I’m quite sanguine about their future, even if it takes hard landing or two. It ours that’s the problem.

  5. Once could almost argue given the scale of the binge in China its not too different to the U.S pre 1930, the newly created Fed begun its open market operations purchasing government bonds for the first time to try and influence activity I think in 1919…When the eventual bust came a new era relationship between the State and its citizens was created with the new deal from FDR.
    Maybe the Chinese will bring in widespread social security, universal health insurance, etc which along with liberalised interest rates will allow the people let up on saving (buying empty apartments)and spend more on consumption.
    More household consumption, less investment is th only way out here, still not good for Australia Inc in short term

    • That is what they are doing.

      Reader Resaerchtime argues that the US 1920s is precisely the analogy in play and that means that iron ore is going down farther and more swiftly than anyone dares predict.

  6. Hmm, well if history is a guide here, maybe Russia, is Japan around 1930 too beating up old friends and neighbours as its old economy runs out of momentum and a new militarized economy develops. Its citizens go along in part to right previous humiliation by the west. Meanwhile on the other side of the world, China now (Germany then) decides to push old territorial disputes (east china sea) then Sudetanland…you know the rest.

  7. Word is authorities will wait until post March data to fine-tune policy (stimulus). If needed.

    NDRC maintaining strong line that growth 7.5% or greater necessary to maintain stability necessary to implement key reforms.

  8. Waiting with baited breath to see if the communists can save the socialists. Psst, here’s news for you – It ain’t gonna happen!