Excessive stimulus unlikely in China
- By Ma Jun
0 Comment(s)
Print
E-mail Shanghai Daily, June 4, 2012
News flows over the past week suggest the Chinese government has started to take more aggressive steps to support economic growth - including accelerating project and bond approvals, more incentives for consumers, and window guidance for banks to lend more.
Anecdotal stories and unconfirmed reports that are getting some investors excited include: "hotels near the National Development and Reform Commission are fully booked", "the NDRC approved 100 projects in one day", "a program of subsidies for auto sales in rural areas and a revival of the trade-in policy for autos will be announced soon" and "value-added tax reform will be extended to Beijing and many other provinces", as well as market comments that the government may introduce a stimulus package of 2 trillion yuan (US$317 billion). On the other hand, the NDRC publicly stated on May 29 that "there would be no new stimulus package of 4 trillion yuan." So what is really going on?
Within budget
Despite apparently exciting stories that the NDRC approved many new projects and that many of these will be funded or partially funded by the budget, and indications that the government will announce additional fiscal incentives for consumers (such as the auto trade-in policy, and incentives for construction materials in rural areas, and for furniture), these measures are all within this year's budget as approved by the National People's Congress in March.
The total budget deficit remains 800 billion yuan and we do not expect a supplementary budget unless there is a collapse in the European economy later this year.
Therefore, all the fiscal and related NDRC measures (such as acceleration in fiscal spending and approvals for projects funded by the budget) are simply accelerating the pace of disbursement from the original budget.
Given the front-loading of budget implementation, these measures should boost activities in the coming few months, at the expense of slower disbursement in the later months of this year. For the year as a whole, there is no new fiscal stimulus.
In our view, the most useful policies for the real economy include: 1) faster new project approvals, so these projects become new borrowers from banks; 2) window guidance to banks for them to lend more aggressively to medium- and long-term projects, which will also help boost lending; 3) a likely cut to lending rates, which will help boost demand for loans.
Reversing loan growth
The purpose of these policies is to reverse the trend of declining new loan growth. In April, new loans were only 680 billion yuan, 120 billion yuan below our expectation of 800 billion yuan.
Note that 800 billion yuan per month in the first half of this year and 530 billion yuan per month in the second half is necessary for achieving the annual new loan target of 8 trillion yuan. We assume that the above-mentioned policies aim to return the monthly lending profile to the original plan, and these policies would be in place in the coming three to five months.
Therefore, on a monthly basis, these policies will help boost loan demand by around 120 billion yuan; and the total impact of these policies should be equivalent to providing additional credit of 400 to 600 billion yuan (120 billion yuan per month times 3 to 5 months) to the economy.
In terms of impact on the economy, given that 500 billion yuan of additional credit can boost loan growth by about 0.8 percentage point, and that historically a 1 percentage point rise in loan growth tends to increase gross domestic product growth by half of a percentage point, the implication is that these policies should boost annual GDP growth by around 0.4 percentage point.
As these policies will deliver their impact mostly in the second half of this year, they should help boost year-on-year GDP growth from 7.7 percent in the second quarter to around 8.5 percent in the fourth quarter.
Too much stimulus? Unlikely!
Some readers have asked whether this time the government may once again provide too much stimulus which will later create another round of inflation, asset bubbles and non-performing loans. Our answer is "unlikely." Three things are very different between now and 2008/09.
First, even if the government asks the banks to lend a massive amount to infrastructure projects, banks will be much more cautious due to the lessons learnt from 2009. We do think the banks will react positively to the government's window guidance but the reaction will be less enthusiastic than before.
Second, many officials and policy advisors are warning against excessive policy stimulus now, unlikely in early 2009 when very few people were vocal against over-lending.
Thirdly, despite that industrial production growth dropped sharply in April, the employment situation remains healthy at the moment. This is very different from early 2009 when 20 million manufacturing workers were reportedly laid off.
On external risks, this time economic weakness is still concentrated in the peripheral European countries while the US economy is still in a mild recovery. The last global financial crisis in 2009 was a global banking crisis and the impact on China was much severer at that time, with Chinese exports falling 20 percent for 10 months in 2009. The external shocks so far are much milder and their impact on China is smaller in terms of trade and financial linkages.
To conclude, we believe that, this time around, the magnitude of policy stimulus will more likely to be the right one. It should be enough to get GDP growth back to 8.5 percent year on year by the end of this year, but should also avoid generating inflation and asset bubbles afterwards.
Go to Forum >>0 Comment(s)