Most of us say "thanks" without thinking.
NEW YORK, April 7 -- The Conference Board issued the following news release:
Last Wednesday evening China'sState Council announced new policy measures aimed at stabilizing the slowdown in economic growth. The policy developments are narrow and targeted and include three specific changes. First, some taxes for small- and medium-sized enterprises (SMEs) will be reduced. Specifically, the threshold of companies' taxable revenue base will be raised from its current level of 60,000 RMB/year (although the new level was not specified). Secondly, the government will seek to accelerate the pace of shanty town renovation, and the China Development Bank will establish dedicated financing mechanisms for this program. Thirdly, spending on railways will be accelerated, yet again, by embarking on 6,600 kilometers of new construction in 2014 (up from 5,600 km last year). The government will also establish a fund of 200-300 billion RMB to subsidize rail development.
These policies will not, we assert, reverse the "soft fall" in economic growth that China is undergoing - at least not for long. The pace of Chinese growth is decelerating fairly rapidly based on all the economic data we have received so far in Q1 of 2014 (more on the latest data below). Clearly, the leadership has become uncomfortable with the pace of the slowdown and is seeking to roll out targeted, quasi-fiscal measures to help stabilize growth. Whether the announced measures will buoy growth at all is questionable. And in looking at the announcement, there are both positive and negative aspects to the most recent support program.
Let's start with the positives. First - this is not really a stimulus, per se. So far the measures amount to targeted policy "fine-tuning" akin to what we saw throughout 2012 - not a true ramp up in infrastructure spending as occurred in Q3 2013 - at least not yet. The other encouraging feature of the announcement is its partial focus on SMEs. This cohort has taken the brunt of the economic slowdown over the past two years, as demand has been weak and financing conditions have been extremely difficult (and expensive). Allowing them a bit of breathing room on the tax side should be a welcome development. However, many SMEs are thought to avoid corporate tax outlays for the most part through various business expense offsets, so the strength of any potential impact is unclear. While it won't enable or encourage these companies to ramp up production, the support should allow them to continue adjusting to the slowdown - and potentially use the extra cash to pay down some of that debt burden that currently stands around 185 percent of GDP for the "private sector" (it's impossible to pin down an exact definition for this sector in China).
Now the bad news. Any emphasis on increased railway spending always gives us pause due to the already rapid pace of investment in the sector (growth stood at 28 percent in 2013), and its notoriety for corruption. At the beginning of this year, the new China Railways Corporation (which came out of last year's restructuring of the Ministry of Railways) had been set to reduce railway spending in 2014 - to 630 billion RMB from over 660 billion RMB in 2013. Clearly, that's not going to happen. Presumably, the original spending target was set on the assessment that investment and borrowing should ease a bit from last year. Whatever the case, it's not surprising that Chinese policymakers have relied on this tool, as it's been effective in boosting growth in the past, and many parts of China arguably still needs further investment in transportation infrastructure. But it does belie policymakers' reflex to fall back on investment, especially investment that supports upstream State steel, cement, aluminum, and other input producers - sectors that are known to be troubled at this juncture. The five specified routes for the investment - Xinjiang Hongliu River to Diaomao Lake; Harbing to Mudangjiang; Harbing to Jiamusi; Qingdao to Lianyungang; and Hangzhou to Huangshan - also seem commercially questionable.
Even more worrying are the pronouncements around the new methods of financing for shanty town renovation and railway investment. The statement claims that financing will be more market driven because bonds that CDB will issue in order to finance shanty town renovation will be collected from more financial institutions including Postal Saving Bank of China. Commercial banks, pension funds and insurance companies will also be "encouraged" to participate in the bond buying. These developments do not indicate a "decisive role for markets", but instead smack of continuation (if not expansion) of state-directed credit. Same for the 200-300 billion RMB in railway subsidies.
A final concern around the recent announcement of new policy support is that it may ultimately be a red herring - showing restrained fiscal support while the real stimulative measures come from other channels. While we, like others, fully expected the leadership to enact economic support policies to affect stability, we continue to foresee the bulk of aid coming from the monetary side - not the fiscal side. In other words, the real space to watch in determining whether or not the leadership is stimulating the economy will be the pace of credit growth, not announcements of targeted easing from the State Council. The latter appear to show restraint in the face of the slowdown, but the outlook for the former is uncertain. At this point, we are still unsure of the overall monetary policy stance in China. The official line from the PBoC (reiterated just last week) is that it will continue to enact "prudent" policy, which suggests a continuation of gradually slowing outstanding credit growth.
However, the overall liquidity environment seems much more supportive of faster credit expansion. The 7-day repo rate finished last week at 3.01 percent, after temporarily spiking due to quarter-end liquidity demand. Furthermore, since the beginning of February, the 7-day rate has averaged 3.67 percent, down from 4.32 percent in second half of 2013. The PBoC's stabilization of the 7-day rate between 4 and 5 percent throughout H2 2013 was consistent with a very gradual tightening policy. And while it may be true that onshore selling of the RMB (due to the currency's recent depreciation) may have largely driven rates weaker in February, the 7-day rate has remained below 4 percent (except for a very short quarter-end window) after recovering from a low of 2.22 percent in mid-March.
Because of the effect of foreign exchange flows and RMB deprecation on the liquidity environment since the beginning of this year, it is difficult to tell where the PBoC intends to guide rates in the coming weeks. We will have a better idea of the credit environment once March lending numbers are published next week, but it is likely that bank lending accelerated somewhat in reaction to such low interbank rates. Indeed, new bank loans for March are likely to have been just shy of 1.37 trillion RMB, and while non-bank lending may have suffered a bit from the reversal of the carry trade in March, these forms of finance look set to also come in over 1.3 trillion RMB. Crucially, if interbank rates remain low and policymakers become more worried about economic growth throughout April, the rest of the year could see a slight acceleration in credit growth. The potential changes in credit creation will be the true barometer of whether or not stimulative policy is being undertaken. But they will be subtle changes and won't grab headlines like a statement of policy support from the State Council.
Continued soft data points this week included:
HSBC and official manufacturing PMI's were both soft in March, despite moving in different directions. The HSBC measure fell for the fifth consecutive month to 48.0, down from 48.5 previously, and registering an eight month low. The output sub-component dropped to 47.2, and overall new orders fell to 46.5 from 48.6. The latter movement occurred even as new export orders improved, highlighting that the weak orders are driven by sluggishness in the domestic economy. The official PMI, meanwhile, edged up to 50.3 from 50.2 in February, but the 0.1-point increase was the smallest on record for March. While the official number is seasonally adjusted, the methodology is opaque and does not fully account for all the cyclical fluctuations. A seasonal pattern clearly still exists, with March always improving from February - by 2.8 points on average since 2005. So despite the uptick in the official PMI, both surveys indicate ongoing weakness in China's manufacturing sector, with more acute pain felt by smaller companies - reflected in greater weakness in the HSBC reading.
The HSBC services PMI improved in March to 51.9 from 51 in February, but it remains well below its long-term average of 55.7. In addition, the new business component fell, indicating that March's bounce back is unlikely to be long-lasting. The official non-manufacturing PMI eased to 54.5 from 55 in February. Overall, while the service sector seems to be faring somewhat better than manufacturing during the slowdown, progress on this front remains fragile and growth in the sector is weak when compared to historical trends.
Finally, data from the China Index Academy showed that growth in home prices for 100 cities in China slowed further in March, up 0.38 percent from the month before compared to 0.54 percent m-o-m growth in February. Local media reports indicate that loosening of real estate policy may be in the offing in some localities. If this development comes to fruition, it may help to stabilize growth in the short term. But it will only exacerbate the acute overcapacity in the sector and amplify the knock-on effect of weakening productivity growth. Real estate remains a major vulnerability for the economy.
TNS 24HariCha-140408-30FurigayJane-4695015 30FurigayJane