So much for China’s mini-stim­u­lus

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

So much for the ‘mini-stim­u­lus’. The data on China’s eco­nomic per­for­mance in Au­gust were dis­mal, show­ing a sig­nif­i­cant and un­ex­pected de­cline in growth. The boost from the gov­ern­ment’s suite of sup­port­ive poli­cies was al­ways go­ing to be tem­po­rary, but re­newed weak­ness is ap­pear­ing much sooner than ex­pected. We had pre­vi­ously thought that pol­icy could keep growth sta­ble for a cou­ple of quarters, but it only re­ally worked for two months (May and June). So it looks as if the gov­ern­ment has al­ready lost its bet that it could keep GDP growth near its 7.5% tar­get with only min­i­mal in­ter­ven­tion. With China tran­si­tion­ing out of its high in­vest­ment phase, growth is on a down­ward tra­jec­tory. To al­ter that tra­jec­tory would re­quire large scale mon­e­tary eas­ing, but the gov­ern­ment does not yet look in­clined to support such a big shift in strat­egy. All of which points to more of the same: mod­est pol­icy support and weaker growth.

The Au­gust num­bers were dire: growth of in­dus­trial value-added slumped to 6.9% year-on-year, from 9% in July, to give the low­est read­ing since 2009. Of­fi­cial statis­ti­cians blamed a high base ef­fect for the slow­down, since growth was 10.4% last Au­gust. But their ex­pla­na­tion is hardly con­vinc­ing, as growth on a se­quen­tial ba­sis was also ex­tremely weak. Mean­while, fixed as­set in­vest­ment growth de­clined to 14% from 16% in July, as the pri­vate sec­tor re­mained cau­tious and the pickup in spend­ing by sta­te­owned en­ter­prises ended. The bright­est spot was the ex­ter­nal sec­tor, where ex­port growth ac­cel­er­ated and the trade sur­plus hit record highs in both July and Au­gust. There is also good news from the labour mar­ket: new ur­ban jobs have in­creased by 9.7mn in the first eight months of the year, almost achiev­ing the full year tar­get of 10mn.

Fun­da­men­tally, China’s growth is slow­ing be­cause pri­vate sec­tor in­vest­ment sen­ti­ment is weak: fixed as­set in­vest­ment by non-state com­pa­nies has been steadily de­cel­er­at­ing since 2010. In part this re­flects a nec­es­sary adjustment of com­pa­nies’ growth ex­pec­ta­tions-no one ex­pects GDP of 10% growth any­more-but there is also much un­cer­tainty about how the tran­si­tion away from the in­vest­ment-driven model will play out. The gov­ern­ment has used state sec­tor in­vest­ment to smooth this slow­down, and the lat­est boost led to a slight re­bound in the sec­ond quar­ter. But the support from state in­vest­ment did not last, as mon­e­tary pol­icy did not get looser, and fis­cal spend­ing was forced to slow to stay within bud­get guide­lines.

To­tal credit growth slowed to 15% YoY in Au­gust, after reach­ing 17% in June, as loan growth was only mod­est and shadow fi­nanc­ing has col­lapsed. Both bankers’ ac­cep­tances and trust loans de­clined out­right in July and Au­gust-a si­mul­ta­ne­ous sus­tained de­cline that has never hap­pened be­fore. The Peo­ple’s Bank of China has tra­di­tion­ally been more hawk­ish than the rest of the gov­ern­ment, and its support for ‘se­lec­tive eas­ing’ was half-hearted at most. While it did in­ject more liq­uid­ity into the tra­di­tional bank­ing sys­tem, it also rolled out new reg­u­la­tions on in­ter­bank bor­row­ing that con­tained the growth of shadow fi­nance. At the same time, banks are get­ting much more cau­tious about lend­ing, given the in­crease in their own bad loans, the poor state of cor­po­rate bal­ance sheets, the de­te­ri­o­rat­ing prop­erty mar­ket and fall­ing com­mod­ity prices. It is likely the crack­down on fraud in trade fi­nance in Qing­dao has also made banks more risk-averse. Given all this, banks are un­will­ing to ac­cel­er­ate lend­ing with­out very strong support from the cen­tral bank.

China’s GDP growth has been on a mostly down­ward tra­jec­tory since 2007, and short term growth is greatly de­pen­dent on credit. So, pol­i­cy­mak­ers are fac­ing a tough choice: ac­cept higher debt in or­der to get higher short term GDP growth or ac­cept slower growth in the near term. The sig­nals have been ex­tremely in­con­sis­tent this year, but at the World Eco­nomic Fo­rum last week, Premier Li Ke­qiang said the gov­ern­ment is com­fort­able with growth “a bit lower” than its tar­get.

The cen­tral bank also still seems un­will­ing to loosen mon­e­tary pol­icy as it is wor­ried about China’s ris­ing debt. There­fore, the gov­ern­ment will just con­tinue with its ‘se­lec­tive eas­ing’ poli­cies, and will not take more rad­i­cal mea­sures such as an in­ter­est rate cut, or at least not in the near term. With the help of net ex­ports GDP growth in 2014 can stay slightly above 7%. Nev­er­the­less, it will miss the gov­ern­ment’s 7.5% tar­get.

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