Economists See China Holding Stimulus in Check Amid Uncertainty
by Jeffrey Black(Bloomberg) — Economists broke down China’s annual policy-document dump and concluded that Beijing is holding stimulus measures in reserve in case the global impact of the coronavirus pandemic worsens significantly.
The government reports released on the first day of the National People’s Congress on Friday were revolutionary in that they dispensed with an explicit target for gross domestic product growth, but otherwise stuck to the path of moderately increasing support to the economy.
China Abandons Hard Growth Target, Shifts Stimulus Focus to Jobs
That said, analysts see monetary policy easing being ratcheted up in the near term, a boost for infrastructure investment ahead, and strongly increasing credit growth this year.
Here are some economist takeaways from Premier Li Keqiang’s work report and the other policy documents:
Beijing Has Real Growth Assumptions
Premier Li’s report may have left out the growth target but that doesn’t mean policy makers don’t have a rough idea where — pandemic permitting — they want the economy to land this year. An expansion of around 3% would be required to meet the employment target of 9 million new jobs, according to Societe Generale SA economists Wei Yao and Michelle Lam.
“If the economic situation deteriorates more sharply than currently expected, we think that there is definitely scope for easing to be ratcheted up above what has been committed,” they wrote in a note. The jobs target “cannot be achieved if real GDP growth is significantly below 3-4%.”
Expect Strong Credit Growth
Premier Li was explicit that money and credit growth should be “significantly higher” than in 2019, and that implies further reserve-ratio cuts and other measures by the People’s Bank of China.
Whereas in 2019 the government wanted money and credit growth to remain largely in line with the nominal growth of the economy amid a long-standing effort to rein in indebtedness, that approach is gone this year.
That’s already happening, with both broad credit and aggregate financing expanding this year at a pace much faster than in 2019. As banks are required to increase their loans to manufacturers and small and private firms, credit expansion will likely maintain a fast pace.
Nomura International Ltd economists including Lu Ting in Hong Kong wrote that the PBOC is likely to inject liquidity into the economy via further reserve-ratio cuts “by as much as 100 basis points over the next couple of weeks.” The pledge by Li for further interest rate cuts also means a rising chance of a benchmark deposit rate cut, they wrote.
Focus on Infrastructure Investment
Some economists expressed disappointment that the official fiscal deficit target of “more than 3.6%” of gross domestic product wasn’t more aggressively widened. The increased gap mainly reflects a drop in revenue rather an expansion in spending. Others focused on the target for local special bond issuance of 3.75 trillion yuan ($525 billion), a source of funding for infrastructure investment that’s toward the high end of previous expectations.
“The higher quota of special local government bond issuance, together with stricter guidance for these bonds to be used for infrastructure projects instead of land reserves or property-related projects, is likely to provide a boost to infrastructure investment,” economists at HSBC Holdings Plc including Qu Hongbin wrote in a report. “New infrastructure will be a priority, including next-generation information networks, expanded 5G applications, and more charging facilities to promote wider use of new-energy automobiles.”
Mysterious Monetary Policy
Li’s work report mentioned that the People’s Bank of China would work to develop new monetary tools to “directly reach” the economy, without giving any detail about what that meant. Economists have since speculated that this really means an expansion or adaptation of instruments already present in the PBOC’s complicated toolbox.
Economists including Robin Xing at Morgan Stanley wrote that this pledge could involve “quasi-fiscal measures” such as more re-lending, a tool that channels cheap credit to targeted sectors. It doesn’t, Xing wrote, involve the direct purchasing of government bonds by the PBOC.
It could also includes measures to support the issuance and liquidity of low-rated bonds, as well as direct purchase of assets to increase credit to sectors such as the renovation of old housing, according to Ming Ming, head of fixed income research at Citic Securities Co.
In general, monetary policy will make more efforts to improve the direct financing of companies in 2020, he wrote in a note. “Reaching the real economy directly means shorter transmission of monetary policy and better efficiency.”
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