As stimulus mounts in China, so does confusion about reform and growth prospects. The following summary from Investing in Chinese Stocks captures the moment for fiscal policy:
If China was more transparent we’d be able to know what is really going on behind the scenes. I still expect reforms to move along, but the stories below are not very supportive of those expectations.
The Ministry of Finance wants governments to spend. From Reuters:
As it is, Beijing has already instructed local governments to spend all of their 2014 budget by the end of June to shore up the economy, or risk losing the funds. As a result, separate data on Wednesday showed fiscal spending surging 25 percent in May alone.
What’s the plan for July through December then? Then there’s Li Keqiang on the man-made GDP number. From SCMP:
“China’s economy needs to grow at a proper rate, expected to be around 7.5 per cent this year,” Li wrote. “It is slower than the past, but normal.”
“Despite considerable downward pressure, China’s economy is moving on a steady course. We will continue to make anticipatory and moderate adjustments when necessary. We are well prepared to defuse various risks. We are confident that this year’s growth target will be met.”
China’s real estate investment growth rate is headed to the single digits by July or August unless there’s a major reversal in the trend from March through May.
Then there’s the fact that the spending push started back in March, from EEO:
The national treasury saw outflows of 1.7 trillion yuan in January and February, then spent 1.3 trillion yuan in March. Over 90% of the money was spent by local governments.
But growth has still struggled. Also from SCMP, Xi Jinping is taking charge of China’s economic reforms:
“The president is becoming much more visible than Premier Li [Keqiang],” said Richard Harris, the chief executive of consultancy Port Shelter Investment Management.
Harris wrote on so-called Likonomics in July last year, when he forecast Li might become a strong “change leader”, with shades of prominent Western economic reformers such as Ronald Reagan of the United States or Britain’s Margaret Thatcher. Harris has since reviewed this assessment after seeing some of the reforms pledged by Li fall short of expectations.
Some experts have shared the frustration, citing lacklustre consumption, slow progress in financial liberalisation and persistent state dominance.
Things seem to be moving along at a China pace from where I sit, but maybe Xi wants to slow the pace of reform…….
Meanwhile, Barclays has raised its growth forecast, from Forbes:
Barclays raised China’s second quarter growth forecast to 7.4% on Friday, with upside risks to their 7.2% year-ending GDP forecast thanks to better economic data flowing out of the world’s No. 2 economy.
……Stabilizing industrial activity and consumption and a moderate slowdown in fixed asset investment (FAI) growth as China pares down spending, particular in manufacturing and real estate. FAI growth slowed modestly to 17.2% year-to-date in May compared to the same period last year when it was 17.3%. Most of the growth in investment continues to be on large infrastructure.
Rising consumption is part of the rebalancing act, but rising consumption will slow economic growth because it is a much smaller part of the economy at the moment.
Then there is monetary policy and the PBOC, which is both tightening and loosening as well. Capital Economics has more:
Tracking the stance of the People’s Bank (PBOC) has become more difficult as it has brought a large number of policy tools into play. But the consistent goal appears to be to stabilise credit growth.
- The PBOC has armed itself with a wide range of tools (and acronyms) in recent months, causing some confusion about exactly what it is trying to achieve. In addition to targeted cuts to the required reserve ratio (RRR), the PBOC has been active with short-term liquidity operations (SLOs), its standing lending facility (SLF), regular open market operations (OMOs) and has breathed new life into its re-lending operations. About the only tool still left in the toolbox is any change to benchmark interest rates.
- SLOs and the SLF are best seen as tools for managing liquidity. SLOs are repo operations shorter than seven days’ duration; the SLF provides banks with liquidity for up to three months. They were first made available to large banks in early 2013 and the SLF was expanded to cover smaller banks this year. The SLF expansion was an important step as smaller banks are most dependent on the interbank market for funding. The schemes should make cash crunches, as happened in June last year, less likely.
- The other tools are better guides to policy intentions. The use of targeted rather than across-the-board RRR cuts signals that policy fine-tuning rather than easing remains the order of the day. The RRR cut that came into effect today applies only to rural and city banks and a small number of mid-sized national banks (the PBOC seems to have slightly broadened its scope since first announcing details a week ago). Along with the RRR cut in April, it will have an impact equivalent to the injection of RMB150bn or so to the monetary base. That’s small – the more usual 50bp cut for all banks would free up RMB550bn.
Another debate is transpiring around the direction of the yuan. From the FT:
After a five-month slide, the renminbi seems to be getting its mojo back. Last week, the Chinese currency rose 0.5 per cent against the US dollar over five days, the most since 2011.
…While some analysts have trimmed forecasts for both growth and currency appreciation this year, the majority remain confident the renminbi will be stronger at the end of the year, and that the economy will grow at a minimum annual rate of 7 per cent, if not meet Beijing’s target of 7.5 per cent. Most have also taken the view that the renminbi’s recent fall was an engineered move designed to scare off speculators, and as such will prove temporary.
…Diana Choyleva of Lombard Street Research first predicted a weaker renminbi in November2013, saying then that the currency was 15-25 per cent overvalued against the dollar – a view she continues to hold. The fall since, when coupled with producer price deflation, has resulted in only a 5 per cent adjustment so far.
Her renminbi view is based on the belief that with China simultaneously slowing and opening up, capital will increasingly flow out rather than in as domestic investors diversify away from a stumbling economy. That in turn would put downward pressure on the exchange rate as those investors sell renminbi to buy foreign currency.
China does not need a lower yuan. That will implicitly shift spending power away from households, the opposite of rebalancing. Nor does it need a relentlessly rising yuan, which will crimp competitiveness and result in renewed flows of international hot money into Chinese shadow banking assets, releasing credit.
Policy fine tuning is, I think, the best way to view all of it. There has been no move resuscitate broad credit, though it appears to have stabilised, and significant if targeted fiscal spending will be required to offset the real estate slowdown. The yuan can be used to apply or release pressure as well.
It looks like steady as she goes for managed reform to me, one foot on the brake the other on the accelerator. We’ll see quarterly growth jump around but the trend remains a steady slowing, barring an accident!
