Soft start to prompt more easing policies
Print Edition
January and February’s data set saw China’s economy enter 2015 on a very weak start.
This has already prompted a series of policy actions over the past two months, including the announcement of expanded tax relief for small and medium-sized enterprises, increased support for water related investment projects, and both a reserve requirement ratio (RRR) and benchmark interest rate cut.
The National People’s Congress meeting held this month also announced a bigger fiscal deficit and a general easing policy bias.
Will such an intensification of policy support lead to a revival?
Although the government rolled out its easing policy bias relatively early in this cycle, it may take some time and additional policy support for growth to show a noticeably rebound, likely in the second quarter.
First, the severity of the property sector downshift is increasingly pressuring construction and industrial activities, speeding up corporate balance sheet deterioration to further depress industrial investment.
Second, despite big plans to ramp up fiscal support in public projects, delays in finalizing funding mechanism details means that their implementation may be postponed.
Third, the impact of recent monetary easing (including both interest rate and RRR cuts) has yet to catch up with the continued passive tightening of monetary conditions.
Last but not least, escalating deflationary pressures may be triggering a second-round of headwinds for growth via various channels, for example via sentiment as enterprises facing a bleak nominal revenue outlook hold back from restocking and investment activity.
As such, we think a notable rebound in China’s production and investment activities may not occur until the second quarter of this year, once further policy support has come through.
What additional policy support can we expect?
Although this year’s GDP growth target was lowered to around 7 percent at the NPC meeting, achieving this target will require further policy support, which we believe the government stands ready to provide. In particular, we expect:
• Increased fiscal support for infrastructure investment, social welfare spending and tax cuts. This year’s budget deficit will be effectively increased by 1.5 percent of GDP, with the increased spending focused on public infrastructure, social housing, social safety net, and tax relief for small businesses. In addition, we expect the government to use policy banks and public private partnership (PPP) schemes to provide “quasi fiscal” support to the economy.
• Further relaxation of property policies, via lowering mortgage down payment requirements and interest rates, stepping up hukou reform, and reducing property transaction fees.
• Additional monetary easing, via: 1) one to two benchmark rate cuts to curb real interest rate, with the next cut likely in the second quarter; 2) one to two RRR cuts and more liquidity provisions to ensure ample liquidity conditions and stable base money supply. More imminently, we see the People’s Bank of China moving to ease the current tightness of interbank liquidity conditions and lower money market rates; (3) loan quota increases and relaxation of various credit restrictions to ensure 11 trillion yuan (US$1.77 trillion) in new loans and around 17 trillion yuan in new total social financing this year, in order to “maintain appropriate money and credit growth.”
• Acceleration of pro-growth reforms in the areas of government administration, resource and utility pricing, social safety net and hukou, as highlighted in the government work report.
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