AxJ Economy 2Q19: A bet on China stimulus


Contrast between economic data and market sentiment means high expectations from pipeline stimulus measures
Chief Investment Office23 May 2019
Photo credit: AFP Photo


There has been a rebound in investor enthusiasm about China, with equity and bond flows surging and the markets rebounding. This is remarkable, considering the very poor data flow out of the world’s second-largest economy. The latest trade data may have offered some solace, but that could be a one-off; meanwhile, data on sales, investment, and sentiment are very weak.

So, what gives? We think global markets are betting on China stimulus to save the day. The hope is understandable, given that China has accounted for 30-40% of global growth in the past decade. As the economy has become bigger, its 6% growth today provides more value-add than it did when growth was 12%.

Tallying up the various measures announced over the past year, the stimulus package is already impressively large, amounting to over 5% of GDP spread over 2018 and 2019:
  • Last year, the authorities raised the slabs for income-tax thresholds, widened the scope for a number of deductions (e.g. for payments related to elderly care, health, and education), and introduced some efficiency enhancing tax-administration measures.
  • Infrastructure spending, financed by large-scale issuance of special localgovernment bonds, is being ramped up. USD120b worth of rail projects (both over-ground and subway) were announced recently. Related to this, a special bank-financing facility for the private sector has also been announced.
  • The PBOC cut banks’ reserve requirement ratio four times in 2018, and began 2019 with another cut. These cuts released liquidity worth 3% of GDP to the economy.
We do not think the authorities are done yet. There have been concerted calls for corporate-tax relief in recent years, and we think the authorities are very likely to respond to such demand this year. Local media has already reported that small-and-medium-sized companies are likely to get a number of relief measures, including higher income threshold for VAT payment, reduced corporate-income-tax rate for some qualified businesses, and lower social-security-contribution rates for employees.

Also, incentives to purchase home appliances and cars are in the pipeline. Such subsidies have been popular in the past, and considering the weakness in the retail sector, they are critical to stopping further worsening of sales.

While the authorities are unlikely to relax lending standards drastically and push for yet another credit bubble, the recent spate of measures reflects their desire to prevent growth from slipping below 6%. The authorities have certainly succeeded in impressing the markets, as reflected by the bullish price movements in recent weeks.

Our expectations are somewhat modest, though. Given the already-high household and corporate debt burden, likely disruption from tech war, and relatively weak domestic sentiment, the stimulus may succeed in arresting growth slowdown for just a few quarters. Policy multipliers diminish as debt burden rises, as seen in the case of Japan in recent decades. The Chinese economy could well face similar headwinds.

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