So what is this great new Chinese stimulus that world markets are becoming solely increasingly reliant upon for a regular fix of optimism?
Two things that we know so far… sort of:
– It probably will be along the lines of the previous stimulus in that it will focus on infrastructure, construction projects, and some consumer purchase incentives.
– It definitely won’t be as big as the last stimulus which kicked off in 2008 and totalled Rmb4tn. And official media report puts the new one at Rmb1tn.
For a rundown on what is known about the new stimulus, we turned to Stephen Green, Wei Li and Lan Shen at Standard Chartered. Calling it the “mini-me stimulus”, they note that it will likely to be similar to the last round, at least in its approach:
As of yet, no numbers are attached to the package, but many of the measures appear similar –approval of infrastructure projects, subsidies for consumer goods sales, encouragement of non-budgetary sources of financing. The key constraints are policymakers’ hesitation to repeat the mistakes of the 2008-11 stimulus and the banks’ reticence to lend on such a grand scale. The “new” idea in the 2012 package is more private-sector participation, though we are yet to be convinced that enough has been done to make that a reality. Policy development has been gathering pace over the past week. Premier Wen Jiabao made an “economic research tour” of Hubei province from May 18-20 and gave a speech in Wuhan city that signaled a shift to a pro-growth policy stance. On 23 May, the State Council released a statement that called for putting “growth [policies] in a more important position”, recognising the emergence of significant decelerating pressures in the economy.
Without any clear official statement of what the stimulus will consist of, Green and co have had to cobble together announcements and state press reports to draw a picture of what it’s likely to include.
Investment project approvals are first:
In its statement, the State Council called for a major push on projects set out within the 12th Five-Year Plan, particularly big projects that affect manufacturing-supply chains, including rail, energy/environment, rural, western areas, health and education, and IT. There have been stories of increased visitors from local governments at NDRC offices in west Beijing – and the local hotels are reportedly full again – a classic sign of increased project approval activity. Most of these projects will already be at an advanced stage of planning.
(For more on this, WSJ’s Tom Orlik explains how NDRC project approvals are used as a stimulus measure.)
Banks will continue to be a key financing mechanism, write the StanChart strategists, despite the government’s growing belief that lending attached to the last stimulus round created problematic inflation and sent home prices sky-high.
We expect such concerns to be reflected in a much more controlled pace of bank lending. Banks face their own constraints, none more biting these days than the loan-deposit ratio (LDR), on which many small institutions have now maxed out. However, credit growth should respond to the increased pace of approvals, we believe.
This will also mean more credit easing measures beyond the reserve requirement ratio (RRR) cuts already announced:
Interbank funding rates have fallen dramatically over the past two weeks: seven–day repo financing has fallen 134bps,to 2.50% 28 May from 3.84% on 4 May. We are also seeing actual credit costs falling, with discounts to the PBoC benchmark lending rate now being seen in the market. More RRR cuts are likely, we forecast another three in 2012 to keep funding costs low. We currently do not see benchmark interest rate cuts – but if the domestic environment and confidence does not pick up in the next two to threemonths, we expect that rate cuts could be one of the next steps.
Green and colleagues also note:
– The Ministry of Railways recently revealed it secured a 2tn credit line by the end of 2011, and plans to invest Rmb400bn this year.
– An acceleration of bond issuance by corporates and local government investment vehicles.
So, banks will still play a big role. Green and colleagues say there will be pressure on banks to provide funding for continuing projects to be completed, and there may be a loosening of definitions to help banks that are hitting their loan-deposit ratios.
At the same time, they write, “it is possible” the Ministry of Finance may fund more of the stimulus measures directly rather than through banks and the bond markets; but they hadn’t seen much to substantiate this.
Housing: The central government restrictions will remain — as we’ve been expecting — but financing conditions were eased for large developers and “local governments across the country have been quietly introducing additional incentives and cash subsidies for buyers”.
Local initiatives: The local councils will be more than willing to take up these centrally-sponsored offers, write Green and colleagues. From China Daily:
So many projects in China are now awaiting formal approvals that “local officials are standing in line in front of the commission’s Beijing office to get entry permits”, the Beijing-based China Times reported.
It’s not a surprise, given their indebtedness, that local authorities are lining up to get a piece of the project approvals and financing that are being pushed through.
There are also consumption subsidies in the form of a Rmb36.3bn programme to encourage the purchase of energy-efficient appliances and cars; and talk of renewing a programme encouraging households to trade in old appliances for new ones.
Other possible measures, such as tax cuts and support for exporters, aren’t well substantiated so far.
So it’s mostly the same old, same old — only smaller.
Which answers the question of why on earth China would want to build a new steel plant* even though there was an estimated 200m tonnes-plus of excess annual production capacity last year and almost 100m tonnes of iron ore sitting around at Chinese ports (those shipments that can get through).
It’s so 70 new airports can be built in the next five years, even though two-thirds of the existing airports are loss-making.
And new housing can be constructed, even though hardly anyone wants to buy the ones that are already being built.
And the railways…. well, you get the picture.
None of this bodes well for China’s rebalancing. Nor will it make claims that consumption is growing its share of GDP any easier to believe.
China’s economic data disaster – FT Alphaville
China’s rebalancing will not be automatic – Nicholas Lardy/East Asia Forum
A fate worse than a hard landing for China – FT Alphaville
China tells banks to roll over loans – FT
*The new Baosteel project was approved on the condition that it would mean a net reduction in steel output capacity of 6m/tonnes/year. But that’s still pretty small beer compared to the apparent excess capacity.