Standard Chartered analyst Stephen Green has been pondering the meaning of the People’s Bank of China (PBoC)’s declaration that monetary policy was undergoing a ‘moderate adjustment’”
As he writes on Wednesday:
Was the small July loan growth number the result of banks being quietly restrained, or just exhaustion on the part of loan officers after the blow-out in June? When will ‘moderate adjustment’ evolve into something public and substantive like raising the deposit reserve requirement and/or interest rates? The market is concerned and confused. As a result, A-shares have sold off some 18% from their peak. 52% of investors surveyed by the ‘Economic Observer’ newspaper (?????) said last week that ‘moderate adjustment’ would have a big impact on their markets. That might not be the only thing they have to worry about.
Which brings him to the fast diminishing effects of the fiscal stimulus…
China’s fiscal stimulus has peaked, and its effect now seems to be fading. After a massive shot of spending hit the economy at the end of last year, the Ministry of Finance (MoF) is now dialling things back. Take a look at Chart 1, which shows our estimate of China’s ‘fiscal impulse’ (FI), the standard measure of the stimulus provided by budgetary spending.
Here’s the chart…
So why is the fiscal stimulus fading? According to Green there are two reasons: first, spending growth is slowing and second, revenue growth is picking up. And herein lies the problem. As Green explains:We run into one of the classic problems with China’s macro-management style: the tyranny of targets. While most economists would be counseling tax cuts and other measures to lighten the load for business, the MoF is doing its level best to hit its 8.2% total revenue target for 2009, causing a fair amount of misery for the corporate sector. Compounding the problem, the targets tend to rise as they are transmitted down to local governments. According to the ‘Economic Observer’, many city and district governments are being asked to hit an 11% y/y revenue target this year, just so that their superiors can be sure to hit their target.
We are not sure to what extent companies are actually paying unpaid taxes — or are just contributing funds from their current revenues out of patriotic duty. There are certainly anecdotal reports of the latter. So while the government wants companies to invest in theory, the funds they need in order to do so are being taken. This is the way China’s stimulus ends. Not with a bang, but with a whimper.
In other words, the money is being recollected before it can do any good.
Related links:
Shanghai turndown – FT Alphaville
QE, explained? – FT Alphaville