From Citi:
Growth target may be lowered to 7% – The Politburo set the tone on Dec 5 for the central economic work conference (CEWC), reportedly to be held from Dec 9.The Party leaders emphasized that in 2015 the government should adapt to the “new normal” and focus on the quality of economic development, while attaching more importance to reforms. To keep economic indicators within a reasonablerange, proactive fiscal policy and prudent monetary policy will be maintained. We estimate China’s self-sustained growth at 6.0-6.5% amid weak demand, and policy support would be needed to achieve growth of ~7%. We expect 2 more rate cuts (25bps each) by mid-2015, and 3-4 broad RRR cuts (50bps each) by end-2015.
Fiscal support limited with extra-budgetary activity contained – Main targets will be set during the CEWC, but formal announcements are usually made only in Mar during the NPC meetings (Figure 1). The budget deficit will likely be increased from roughly 2% of GDP in 2014 to 2.5% of GDP in 2015. However, extra-budgetary operations will likely be curtailed as local government debt financing is expected to be tightly controlled. Overall fiscal stance could be neutral or somewhat tighter.
Monetary policy may have to do the heavy lifting – We think the rate cut in Nov would not sufficiently lower banks’ funding cost. To preserve interest margin, banks may not cut lending rates on new loans. We estimate that average CPI inflation will fall to 1.9% in 2015, suggesting real rate for one-year deposits of more than +1%. To bring down the cost of capital and mitigate financial stress of the highly-indebted corporate sector, we expect PBOC to cut rates in Q1 and Q2, respectively.
RRR cuts, not if but when – We expect PBOC to keep M2 growth target at 13% to ensure adequate liquidity and on-balance-sheet lending to offset the impact of tighter shadow banking regulation. However, achieving the target has become more challenging due to large capital outflows since Apr and stagnant reserve growth. Friday’s Politburo meeting called for balancing of exports and imports together with FDI inflows and outflows, suggesting the government would be comfortable with an overall BOP balance and stable FX reserves. Without major reserve accumulation, money growth is likely to be weak, and PBOC will have to cut RRR to release longterm liquidity instead of relying on short-term liquidity management (e.g., MLF).
Yep, new support forthcoming to manage the glide slope.
