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Premier Wen signals economy could regain steam soon
By Morgan Stanley Research |
August 23, 2012, Thursday
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Print Edition
Print Edition
THIS month, Chinese Premier Wen Jiabao stated "boosting confidence and focusing on employment" as the mission of his two-day field trip to the eastern province of Zhejiang on August 14 and 15.
While he expected the economic outlook to remain challenging for some time to come, he also highlighted that China's overall economic fundamentals remain sound, despite the further moderation in July's growth indicators.
According to Premier Wen, existing pro-growth measures will play an important role to support growth, and positive signs have started to emerge. Meanwhile, Premier Wen urged further efforts to boost employment, and provide special support to labor-intensive and small companies on this front.
In our view, Premier Wen's remarks came just in time to help guide the expectation of policy easing, given the disappointment from July's data.
Green shoots
It shows: 1) the current slowdown remains the central government's major concern; 2) there are green shoots of a growth rebound that people should note; 3) it is important to maintain business confidence (which reminded us of his speech in the fourth quarter of 2008 that "confidence is more important than gold"); and 4) Chinese policymakers are watching the employment data closely as they expect the downward pressure from the underperforming heavy industry.
We agree that there is still a good chance of meeting the 7.5 percent gross domestic product growth target. In addition, if policymakers can continue with the rapid pace of fiscal easing or step up monetary easing as we predict, we believe the probability of an 8.0 percent reading for annual GDP should exceed 50 percent.
In contrast to the central bank's cautious views on rising domestic inflationary pressure, we note that Premier Wen focused on the decline in CPI inflation and saw more room for monetary easing. We believe this will likely lead to more lenient loan quota policies, rather than any immediate cut in the reserve requirement ratios or the interest rates in this month.
Meanwhile, we think that the People's Bank of China will most likely push the next reserve ratio cut to September or early October, and continue to use reverse repurchase of bills to provide liquidity to the inter-bank market.
The article was based on a research note written by Helen Qiao, Yuande Zhu and Ernest Ho at Morgan Stanley Asia Limited, which was issued on August 16. The opinions are their own.
While he expected the economic outlook to remain challenging for some time to come, he also highlighted that China's overall economic fundamentals remain sound, despite the further moderation in July's growth indicators.
According to Premier Wen, existing pro-growth measures will play an important role to support growth, and positive signs have started to emerge. Meanwhile, Premier Wen urged further efforts to boost employment, and provide special support to labor-intensive and small companies on this front.
In our view, Premier Wen's remarks came just in time to help guide the expectation of policy easing, given the disappointment from July's data.
Green shoots
It shows: 1) the current slowdown remains the central government's major concern; 2) there are green shoots of a growth rebound that people should note; 3) it is important to maintain business confidence (which reminded us of his speech in the fourth quarter of 2008 that "confidence is more important than gold"); and 4) Chinese policymakers are watching the employment data closely as they expect the downward pressure from the underperforming heavy industry.
We agree that there is still a good chance of meeting the 7.5 percent gross domestic product growth target. In addition, if policymakers can continue with the rapid pace of fiscal easing or step up monetary easing as we predict, we believe the probability of an 8.0 percent reading for annual GDP should exceed 50 percent.
In contrast to the central bank's cautious views on rising domestic inflationary pressure, we note that Premier Wen focused on the decline in CPI inflation and saw more room for monetary easing. We believe this will likely lead to more lenient loan quota policies, rather than any immediate cut in the reserve requirement ratios or the interest rates in this month.
Meanwhile, we think that the People's Bank of China will most likely push the next reserve ratio cut to September or early October, and continue to use reverse repurchase of bills to provide liquidity to the inter-bank market.
The article was based on a research note written by Helen Qiao, Yuande Zhu and Ernest Ho at Morgan Stanley Asia Limited, which was issued on August 16. The opinions are their own.
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