Piecemeal Stimulus Does Not Alter Core View
The Chinese government has announced measures to expedite approved rail projects while at the same time increasing the total length of new lines by 18% versus 2013. Additionally, the government added supportive measures for small businesses by easing the qualifying criteria for tax rebates. The announcement follows softening rhetoric from government officials, but is in line with our expectations for small, targeted stimulus efforts. The government will likely need to introduce more of such measures in order for the economy to achieve its real GDP growth target of 7.5% for the year, and we would therefore not be surprised to see additional announcements over the coming weeks.
Such measures will likely look to prop up fixed asset investment, where growth fell to a nearly 12-year low of 17.9% year-on-year (y-o-y) in February. Meanwhile, Beijing will also be particularly sensitive towards any deterioration in labour-intensive industries, with the potential for a slowing economy to lead to rising unemployment. In order to address these areas, some form of monetary stimulus is becoming increasingly likely, and a move to lower banks' reserve requirement ratios (RRR) may be in the offing in order to support credit creation. That said, we maintain that a 2008/9-style 'big-bang' stimulus is not on the cards, as this would undermine the Xi Jinping government's efforts to reinforce its economic reform credentials.
While we cannot guarantee that Beijing will not respond to further economic weakness with increasingly aggressive stimulus measures, we strongly believe that any positive impact of such measures on near-term growth would be outweighed by the negative impact on the medium term economic outlook. Past stimulus packages have been instrumental in exacerbating the unbalanced nature of China's economy, and we believe that they have created growth at the expense of wealth. The surge in property prices over recent years, which has supported economic growth by boosting construction spending, supporting local government revenues, and generally keeping the huge credit boom rolling on, appears to be coming to an end. With this in mind, we maintain that the trend of weakening credit growth is only just beginning, and efforts to halt this trend will not bear fruit.
|FAI Hitting Decade-Plus Lows|
|China - Fixed Asset Investment Ex-Rural, % chg y-o-y|