UBS: Don’t Hold Your Breath for another Stimulus in China
Indeed some market participants seem to be eagerly anticipating or hoping for another stimulus in China, and each day that has passed without a big policy announcement seems to have depressed the market further. While the Chinese government has been very concerned about the economic slowdown and has taken policies to support growth, we would not be holding our breath for another big stimulus. The previous stimulus in 2008-09 did lift growth much higher than otherwise would have been, but the excessive credit expansion also worsened the imbalance in the economy and left serious negative consequences which are still been dealt with today. Chinese government has clearly recognized this and is keen to avoid making a similar mistake this time. Of course, the slowdown in export and in the overall economy is also much milder compared with 2008-09. Importantly, the lack of labour market distress so far has made it less urgent to come up with any big stimulus.
This is not to say that the government has done little or will do little to support growth. Indeed macro policies have changed to supportive of growth since early this year and this has intensified since mid-May. The policies taken so far include fiscal (tax cuts for small businesses, subsidies for some appliances, pension increase, and more spending on social housing), monetary (increase of base money supply through RRR cuts and reverse repos, increase of banks’ lending quota, and 2 interest rate cuts), and credit and quasi-fiscal (easing of lending to the property sector, local government platforms and some sectors, approval and launch of more government investment projects). Among all these, we continue to believe that the measures to increase public investment, to be financed largely by bank credit, will be the most important ones in the near term.
The government has also been trying to encourage private investment in energy, utility, transport and service sectors including by promising easier entry and access to credit, but we think it may take some time before such investment can take off. Most recently, the State Council announced on July 30 that the government will support industrial upgrading including by providing interest subsidies for enterprises to invest in new technology and techniques, more advanced equipment, energy saving process and materials, and advanced information and automation systems. Banks are also encouraged to increase lending to such investment projects.
What about the many “regional stimuli”, including in Changsha and Guizhou? Should we tally up the regional investment plans and count these as stimulus? Not really. While the central government is clearly trying to support growth and investment in the inland regions, we think the many regional stimuli are largely wishful thinking of local governments. The realization of such ambitious investment plans depends crucially on sufficient financing, but banks have been more cautious this time and the overall credit policy is still closely managed by the central government. In addition, the central government’s insistence on not relaxing the property policies wholesale has put limited local governments’ ability to use land/property to finance ambitious investment projects.
Nevertheless, with the continued implementation of the existing pro-growth measures we think GDP growth can still be close to 8% in 2012. In the coming months, we should see bank lending to expand at a steady pace, with the share of medium and long term loans rising gradually, which should help support a modest and investment-led recovery in Q3 and Q4 2012. Industrial profits are down and may continue to be depressed for 1-2 quarters with the ongoing decline in some prices and inventory adjustments, and some companies may not survive this cycle, but we do not foresee major macro risks because of this. Some adjustment and industry consolidation in an economic downturn may not be bad, and many listed companies may emerge from this cycle stronger and more efficient. The ride, of course, may not be pretty.