Is the 2012 China stimulus some kind of unicorn? | FT Alphaville

Is the 2012 China stimulus some kind of unicorn?

As in, does it exist?

Wang Tao at UBS takes aim at the “Rmb1tn stimulus“; she thinks it is not really real:

Well, that is what we call a bit of make-believe. Sure, the weak August data seem to have prompted more policy actions by various government agencies and we expect better implementation and coordination as well. But a closer look at the newly announced approvals shows that these projects have been approved in the past 2-3 months, some as early as April and May, and most of these projects are part of the local governments’ 12th Five Year Plans. In other words, many readers believed that the government suddenly rolled out a RMB 1 trillion stimulus package in the past week ahead of the weak August data, but the truth is that the NDRC just suddenly PUBLISHED the project approvals of the past few months, perhaps to demonstrate that the government’s policy support in the form of infrastructure investment has already been underway.

Wang has also downgraded her forecasts for full-year GDP growth in 2012 to 7.5 per cent from 8 per cent. Yes, 7.5 per cent is the government’s target, but strategists have become so accustomed to seeing China exceed its targets that it was assumed this year would be the same.

However Zhiwei Zhang of Nomura has more faith in the stimulus, and forecasts these measures will help GDP growth rise to 8.8 per cent in Q4. We asked him by email whether he thought the fact that much of the Rmb1tn stimulus might not be ‘new’ was significant. He replied that he sees the signalling of the announcements is significant in itself, and the number of subway lines planned this year is also notable:

[T]o me the fact that they announced these projects so intensively in two days suggests they understand growth faces substantial risks and they need to signal that their policies have changed to a more proactive approach. This is a stimulus as gov only approved 8-9 subway line in 2011 but approved 25 in the past several months. President Hu’s speech in APEC confirms the emphasis on infrastructure investment.

Hu’s speech at Apec was fairly unequivocal about the need to boost growth. From China.org.cn:

Addressing the need to upgrade infrastructure in the context of promoting stable growth and recovery, Hu elaborated on China’s views and stances on building infrastructure for sustainable growth.

This doesn’t get us away from the conundrum that stimulating via infrastructure creates, however: it won’t help at all with rebalancing the economy or making China’s growth more sustainable — both of which, incidentally, were also mentioned in Hu’s Apec speech.

And as Alastair Thornton at IHS Global Insight notes, there’s a more proximate problem:

Is this the start of the long-awaited Chinese stimulus plan? Not quite. Things aren’t as simple as they were back in 2008 when authorities could build roads to grow GDP. The construction of a few more roads and railways needs assistance from the state banks, which appear to be finding it tough to boost credit issuance. The private sector needs to return to life, but appears to busy repairing balance sheets. And the property market needs to translate price gains into construction activity, but without the price gains – that’s tough.

(Indeed, credit issuance by China’s big four banks in August was unchanged from July, according to Chinascope Financial.)

Thornton again:

Moreover, difficulties are increasingly emanating from the external sector. More support measures, such as tax rebates, are in the pipeline for the exports sector, but they can simply aim to keep businesses afloat. They have little impact on aggregate demand.

Credit Suisse’ Dong Tao says the economy is probably not even weak enough to warrant an “all-out stimulus”, and is even more sceptical than UBS’ of the possibly-stimulatory measures announced so far. Emphasis ours:

In fact, the recent rebound in the property market has provided some comfort to the decision makers and has likely delayed the cuts in interest rates and RRR. Ahead of the party congress for power succession in mid-October, we think Beijing will take some pro-growth and pro-stock-market measures in order to ensure social stability, including a cut in RRR. However, we stay with the view that monetary easing would have little impact to growth as the economy is in a liquidity trap. NDRC recently approved a large sum of infrastructure investment. Most of them were included in the 12th five-year plan, hence this should be viewed as planned projects pushed forward instead of new projects. Further, it is not clear how these projects will be funded.

Umm, so that’s both monetary and fiscal stimulus in a bit of a fix, then?

Related links:
China decline sparks “new normal” debate – FT
China economy shows more frailty – WSJ
China stimulates, sort of – FT Alphaville