Is China already panicked to stimulus?

Here’s Premier Li Keqiang:

…it is necessary to coordinate the economic operation in the second half of this year and next year, and strive to keep it within a reasonable range. In view of the environmental changes at home and abroad and the needs of market players, we should maintain the continuity and stability of macro policies, insist on not engaging in “flood irrigation”, enhance forward-looking precision, strengthen interval control and give priority to employment. Our proactive fiscal policy and prudent monetary policy will continue to focus on supporting the real economy and promoting employment. The recent measures to cut the required reserve ratio should be structural, with greater emphasis on supporting micro, small and medium-sized enterprises and labor-intensive industries to help ease financing difficulties. We will support the use of local government special bonds and other funds to promote key construction such as major projects and basic livelihood projects and take comprehensive measures to ease the pressure of commodity price increase. We will continue to give full play to the role of small and medium-sized enterprises and individual industrial and commercial households in promoting socialized employment, expand employment channels for university graduates, provide more working opportunities for migrant workers, develop flexible employment, and strive to achieve full employment.

李克强指出,要统筹今年下半年和明年经济运行,着力保持在合理区间。针对国内外环境变化和市场主体需求,保持宏观政策连续性稳定性,坚持不搞“大水漫灌”,同时增强前瞻性精准性,加强区间调控,坚持就业优先。积极的财政政策、稳健的货币政策要继续聚焦支持实体经济和促进就业,近期实行的降准措施要体现结构性,更加注重支持中小微企业、劳动密集型行业,帮助缓解融资难题。支持用好地方政府专项债等资金,推进重大工程、基本民生项目等重点建设。综合施策缓解大宗商品价格上涨压力。继续发挥中小微企业、个体工商户促进社会化就业主力军作用,拓展大学毕业生等就业渠道,为农民工提供更多打工机会,发展灵活就业,努力实现比较充分的就业。

What matters in this to commodities is the line about local government special bonds and other funds. Readers will know that one of the more significant areas of credit slowdown over the past six months has been just these bonds. I have noted repeatedly that issuance this year has fallen far below the pace of 2020. So far this year only 30% of the quota has been utilised versus last year’s quote at 70% complete. As well, the quota itself has been cut by 5%.

It’s still not clear why the borrowing has been so weak. Some have posited that local governments were already well-funded. Or, that they were listening to the signals from Bejing about deleveraging rather than following the quotas.

My own thesis is that the Three Red Libes policy for developers, which has significantly curtailed land purchases, which are another very significant local government revenue line, maybe disrupting balance sheets and borrowing. There is another bid developer default today.

The point of this analysis is this: when Li discusses accelerating LGSV bonds, he is talking about an existing quota that will still be down year on year.

Acceleration of borrowing would take away the steeper downsides for commodity demand for a while but not the fact that demand is going to fall, both from falling floor area constructions via developers and infrastructure via local governments in 2021/22.

So, no, this is not yet the panic pivot.

Houses and Holes

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