This post started off yesterday as a discussion of the policy options open to the Chinese authorities should they feel the need to do something to stimulate the economy and at what point they might do that. After yesterday's announcement we know the answers to those questions are that fiscal stimulus is the first cab off the rank and they are worried about it now.
issue is the weaker than expected activity data at the start of 2014 with
industrial production, exports and retail sales all coming in below the bottom
end of consensus expectations. Our
forecast growth track for this year assumed a soft start to the year on the
back of domestic weakness, stabilisation in the middle of the year and some
upside in the second half of the year on the back of renewed impetus to exports
as global growth improves.
for the first two months of the year shifted the forecast risk to our March
2014 GDP forecast of 7.4% to the downside and forward looking data such as the
PMI, while supporting our thesis of a soft domestic start to the year bolstered
by exports later on, suggests growth would most likely deteriorate further in
the year to June, to perhaps as low as 7.0%.
all in the context of a 7.5% growth target and a strong commitment to structural
reform. There has been a high degree of equivocation
over this year’s growth target with various members of the leadership talking at
various times about the target not being a hard target and commenting that
growth of 7.2% or 7.3% is “close to” 7.5%.
prospect of a number closer to 7.0% in Q2 has been sufficient for them to act. Remember the Chinese authorities have been
able to continue to focus on structural reform because the labour market has been
holding up well. But there was always
going to come a point at which they would become concerned about low growth and
its implications for the labour market and opt for some cyclical support for
good news is that with inflation running at 2.0% and a forecast budget deficit
for 2014 of 2.1% of GDP, there is ample room to move on both monetary and
fiscal policy. The inflation target for
2014 is 3.5%.
we suspected the initial step has been fiscal.
Yesterday’s stimulus package focussed on infrastructure (railway) and
housing spending. It also offered tax
breaks to small business. There is plenty more ammunition should it be
required. There is more room for fiscal
stimulus, which we expect will remain targeted at infrastructure spending (more
rail, social housing, energy saving initiatives, environmental protection). On the monetary side of the equation PBoC has
tool at its disposal to provide liquidity to keep the cost of capital down such
as suspending repos and cutting the reserve ratio.
the size of the package was relatively small by China standards the more
important point, at least for financial markets, is that it has removed the
uncertainty about at what point the authorities would step in and support