Tag Archives: stimulus

Going Too Fast Off-Balance Could Trip China’s Recovery

THE LATEST BATCH of high-frequency economic data from the National Bureau of Statistics raises a couple of red flags about the unbalanced nature of the recovery and a reminder that China cannot get too far ahead of the rest of the world’s steep climb up the cliff of recovery.

Retail sales gained 4.3% year-on-year in October but lagged industrial output, up 6.9% for the same period, while in January-October, private firms invested 0.7% less year-on-year, while state-owned firms invested 4.9% more. Goods imports were down 2.3% year-on-year in January-October. Exports gained 0.4% in January-October, but if the resurgence of COVID-19 cases in the United States and Europe continues, global demand will stall again, and with it, demand for China’s exports,

On the sunny side of the ledger, more than 10 million jobs were created from January to October. This is 1 million more than the annual target, and thus will tilt the balance of the argument about where growth should come from away from more stimulus and towards domestic consumption.

That is the long-term plan for the economy, but the longer short-term recovery remains unbalanced, the more the risk of financial instability grows.

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Coronavirus Hits China Trade

ANOTHER ECONOMIC INDICATOR has landed underlying the impact of the coronavirus SARS-CoV-2 on the economy, and why limiting the damage is becoming such a priority for Beijing.

Exports in the first two months of the year fell by 17.2%. Imports were down by 4%, implying that while raw materials were still coming in, the interruption to factory production and transport had prevented much being done with them.

Trade data for January and February should always be interpreted carefully as the Lunar New Year brings seasonal distortions. This year, the holiday was extended because of the outbreak. Nonetheless, the direction of travel for the economy seems clear and reinforces the grim message of the manufacturing purchasing managers’ index for February.

Imports from the United States rose, by 2.5% in the two months, suggesting some effort to fulfil the stipulation of the Phase One trade deal with Washington that China will buy $200 billion more US goods and services than it did in 2017. The public health emergency has made meeting that target even more of a stretch than it already was.

The question now is the pace at which demand will recover, both domestically and internationally. For China generally, if not necessarily Wuhan, the epicentre of the outbreak, and surrounding Hubei, there is a glimmer of optimism that the worst is past, with reported new cases of Covid-19 slowing. That is less so for the rest of the world as the virus continues to spread internationally.

Last week, the Ministry of Industry and Information Technology said that less than one-third of Chinas’s small and medium-sized businesses, which employ four out of five workers, had returned to normal operation.

A raft of measures to support such businesses, from the big state banks making available emergency working capital to pushing back tax deadlines, has already been introduced. Policymakers will be preparing to announce further stimulus, with employment a focus. The first-quarter GDP figures are due to be published in mid-April, so more measures are likely before then to ensure that number does not dent confidence in the Party’s economic management.

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Short-Term Stimulus Trumps Long-Term Risk

THERE IS MUCH to digest in the official reports of the annual Central Economic Work Conference just concluded in Beijing.

In short, every available policy tool will be thrown at stabilising slowing growth in the short-term while attempting to keep a clear eye on the long term goal of rebalancing and deleveraging the economy and establishing China’s greater role in global economic governance, the unstated part being that the successful execution of the long-term plan is what will ensure the Party’s continued monopoly on power.

For now, keeping the economic ship stable in turbulent waters in 2019 will demand bigger tax cuts, no tightening of monetary policy and easing as needed, particularly to keep liquidity flowing to small and medium-sized enterprises in the private sector, and a significant expansion of special-purpose local government bond issuance to pay for the old stimulus standby, more infrastructure investment.

This all adds up, if not to a full-blown stimulus package then at least a considerable expansion of this year’s targeted measures.

The downside is that it will slow the long-term structural reforms needed to move the economy up the development ladder and to defuse the country’s underlying debt bomb. The trade tensions with the United States are lengthening the fuse, and that may do more damage to the economy than tariffs themselves.

Deleveraging the economy while simultaneously stimulating it is a difficult balancing act, and the more so in a global economic environment that is more unpredictable and unfavourable to Beijing that any recent leadership has experienced.

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The Appearance and Reality of Resisting Stimulus In China

NEW MONTHLY ECONOMIC indicators confirm the slowing of China’s economy. Growth in retail sales, industrial production and fixed-asset investment all decelerated in October. Nonetheless, central bankers are likely to hold fast against calls for across-the-board stimulus.

A political and an economic reason underpins that view. The first is that old-school pumping of money into the economy that will only flow through to infrastructure investment runs counter to top leadership’s plans to redirect the economy away from investment- and export-led growth to domestic consumption. The People’s Bank of China is a champion of economic reform. It does not wish to be seen to be falling back to the old ways any more than it can help.

The second is that even if it cut interest rates or lowered the banks’ capital reserve requirements, the money freed up is unlikely to find its way to where it could do most good, privately owned small and medium sized businesses. Such businesses don’t have access to the corporate bond market and rely on banks for financing. However, banks have become wary lenders except to the largest and state-owned enterprises that don’t need the money.

The central bank has the room to ease should it choose to do so. Inflation remains subdued, and the economy grew in the third quarter at its slowest rate since the 2008 financial crisis. Against that, the unemployment rate, more closely watched than the GDP number in Beijing these days, is steady. And growth, though slowing, as expected, is not threatening a hard landing.

Targeted stimulus will continue, regardless. The National Development and Reform Commission, the top economic planning agency, has put 21 projects worth $113 billion, including 16 railways and five airports, on the fast track.

The central bank has also quietly been making liquidity available to the banks through its medium-term lending facility. Such loans are a back-door way to push down interest rates without sending an easing signal. It is also three-month money that disappears after that time without also sending a countervailing tightening signal.

The central bank can always roll over the loans after three months should it choose to do so — although by the time they mature the economy may have gotten back on track through the simple expedient of lowering the official GDP target.

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China’s Bankers Resist A Squeeze On Their Margins

China’s four big state-owned banks are reportedly resisting pressure from government planners to offer cheaper loans even as officials want lower interest rates to finance the 700 billion yuan ($110 billion) of infrastructure projects being advanced to stimulate the slowing economy. According to the 21st Century Business Herald (in Chinese), the banks are fearful of the squeeze on their profits and balance sheets while they are still potentially carrying scads of bad debt on their books from the 4 trillion yuan stimulus that followed the 2008 global financial crisis.

Local governments have budgeted for less than a third of the cost of the latest round of investment spending on roads and railways. The rest will have to be covered with bank loans. The banks’ credit quotas for the year still have room to accommodate this. The question is at what rates and to what extent private borrowing is priced out. Bloomberg reports that the banks are already limiting their corporate clients to 10% discounts of the benchmark lending rate, even though they have been free since July to offer up to 30% discounts, a move made by the central bank to encourage business borrowing. There are also concerns that banks are delaying new consumer loans. A case of what one hand stimulates, the other discourages.

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China’s Stimulus Spending Back On Track

Under the Blue Sky train Luo Chunxiao photo
Subways, railways and bridges. That is what China’s latest growth-restoring stimulus spending will look like for the most part. The railways ministry says it plans to spend 470 billion yuan ($75 billion) on lines and bridges this year, 14% more than last year, when spending was still depressed in the wake of the continuing corruption investigations that have dogged the ministry since its former minister, Liu Zhijun, was brought low on graft charges in 2011.

The new spending goal is also a tad higher than the annual spending figure mentioned early in July, 461 billion yuan, a sign that the government thinks the slow down in growth hasn’t yet bottomed out. The latest figure, and news of 27 billion yuan of bond issues to help finance it, followed a meeting of the State Council to discuss the economy. It is still well short of the 700 billion yuan the ministry spent in 2010. Beijing would also like some private investment in the system, and in the utilities, energy, telecommunications, financial, health and education industries.

Meanwhile, 28 cities have plans to build or extend subway systems by 2015, at a total cost of 1 trillion yuan. That is a potential addition to the local government debt bomb that should raise some eyebrows at the very least. Nor is running a subway system once built necessarily cheap. But that is a problem for tomorrow. Today’s priority, as Prime Minister Wen Jiabao repeated this week, is growth. Not that that makes tomorrow’s problems go away.

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A Stimulus Warning From The IMF

This Bystander notes that the latest update to the International Monetary Fund’s Global Financial Stability Report holds the following warning for Beijing:

A large policy-induced credit stimulus could be less effective, and certainly less desirable, than in 2008/9. Relative to other [emerging markets], large economies such as Brazil, China, and India have benefited from strong credit growth in recent years, and are at the late stages of the credit cycle. Expanding credit significantly at the current juncture would heighten asset quality concerns and potentially undermine GDP growth and financial stability in the years ahead.

Policy makers in Beijing are aware that resorting to pumping cash into the economy through infrastructure spending will only delay its necessary rebalancing, but the niggling refusal of the economy’s slowdown to bottom out is increasingly forcing their hand against their better judgement.

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A Stimulus By Any Other Name

When is stimulus spending not a stimulus package? When it is previously planned projects just being brought forward, apparently. State media are reporting that Beijing is saying that it is not going to stimulate the economy in the way it did after the 2008 financial crisis (via Bloomberg). That pumped 4 trillion yuan ($600 billion) in to China’s economy, an steroid-like injection of credit whose side-effects are still being felt in persistent inflation, ailing bank debt and excess industrial capacity.

With the economy again slowing, the temptation is to fall back on tried and trusted methods of state capitalism, and the devil, again, take the consequences. Up to point. Latter this year a new generation of leaders will be ushered in who will have to establish their political legitimacy and sustain the Party’s legitimacy through making all Chinese better off. A delicate balance between a quick fix and sustainable growth will have to be found that still promotes the long-term rebalancing of the economy.

So all praise to five-year plans. The National Development and Reform Commission, the agency that oversees national planning and green-lights individual projects lower down the development food chain, has the capacity to advance 1 trillion-2 trillion yuan-worth of infrastructure projects. It has already approved nearly 900 projects in the first four months of this year, twice the number in the corresponding period of last year. If anything, the pace of new approvals is gathering.

The constraint on policymakers is anunwillingness to repeat 2008s reliance on bank lending to local authorities to finance the stimulus, and a reluctance of the big-state owned banks to make their balance sheets creak any more under a further burden of new loans. Hence the talk on more private-sector financing of the proposed infrastructure investment in railways, energy, green technology, telecoms, healthcare and education.

This month, Beijing has announced a series of measures to give more scope to private capital and to expand domestic demand by subsidizing sales of consumer goods (as it did after 2008). Whether China’s private lenders will provide better judges of risk than their state-owned counterparts is yet to be seen, especially when there are national development goals breathing down their necks. Yet there is also no getting away from the fact that lending outside the state-owned banking sector is rudimentary or informal. The big state owned banks will still have to do most of the heavy lifting of a new stimulus, however it is labeled. Everyone will want to keep their load as light as possible.

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Road To Ruin

China may be looking at spending 600 billion yuan on extending its already over-indebted toll road network. This is another sign, to this Bystander’s eye, that an economic stimulus package in the form of transport infrastructure spending is in the making, but it also raises a red flag about tackling slowing growth this way.

Caixin quotes transport ministry spokesman He Jianzhong saying that the country’s toll roads’ aggregate debt, at 2.32 trillion yuan in 2011, was equivalent to 64% of its accumulated investment of 3.65 trillion yuan, still well short of the 80% he said banks use as a red line when determining whether to grant loans. He says that means toll-road building “still merits bank lending” — 600 billion yuan-worth by our back-of-the-envelope calculation.

Setting aside the thought that there is more sophistication to Chinese banks’ credit risk analysis than that calculation (not something we do with full confidence, it is true), we are surprised that toll roads, some of which are not even earning enough from tolls to cover their existing debt service, would be the recipient of such new investment. The whole system is troubled. Recent political pressure has been to cut the cost of tolls, which are expensive and unpopular with drivers, and to crackdown on illegal toll taking. All this puts further financial pressure on toll-road builders and operators.

Some new toll-road lending has already gone to refinance old loans incurred in the three-year road building frenzy that followed China’s post-2008 global crisis stimulus spending. It is a microcosmic warning of the long-term dangers of relying on fixed-asset investment to generate growth, as China has done. In the end the debt becomes unsustainable.


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China’s Economy Slowing But Not Faltering Enough To Force Change

China’s economy continued to slow in the fourth quarter of last year, though not by as much as many economists, if not us, had expected. Gross domestic product rose by 8.9% in October to December, compared to the same period a year earlier, the National Bureau of Statistics announced. The fourth quarter growth was the slowest for 10 quarters, and the first time the growth rate had fallen below 9% since mid-2009. Full-year GDP growth for 2011 came in at 9.2%, down from 2010’s 10.4%. The cooling of the domestic property market and the moderation of demand in China’s Western export markets have taken their toll on expansion, the one intended, the other not.

Policymakers have been pumping credit into the economy since late last year. That is likely to continue–monetary easing by way of a backdoor stimulus. The questions now are how much will be needed to keep a hard landing at bay, and how much can be risked without re-stoking inflation, which, while down from July’s 6.5% peak, is still ahead of the government’s target of 4% for the year, coming in at 5.4% for 2011. The property bubble has been deflated not punctured and still rising food prices remain a concern, the latter being both politically sensitive and the part of the consumer price index least responsive to monetary policy. Ma Jiantang, head of the statistics bureau, warns that inflation could easily reverse this year its fall in the second half of last.

Given that, and the uncertain outlook for the global economy, particularly its European component, Beijing’s policymakers will have to walk a fine line, a task made more difficult politically by the leadership transition now underway. It is also likely to make policymakers and politicians alike more nervous of tackling the changes needed to rebalance the economy in the longer term, away from export- and investment-led growth and towards domestic consumption. If anything, the higher than expected fourth-quarter GDP numbers bolsters the status quo. It will reinforce the view of the economic conservatives that it is better not to mess with the tried-and-tested mechanism of stimulating the economy via new loans from large state-owned banks to equally politically reliable large state-owned enterprises, as it appears to be forestalling the immediate danger at hand.

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