Shaky Chinese Economy May Get More Stimulus

  • Contribution to GDP from financial services likely to wane
  • China could be easing along with Japan and the euro zone

China’s economy is relying on the shaky pillar of financial services, making more stimulus likely.

While authorities won’t unleash the same flood of credit that followed the 2008 financial crisis, more targeted steps to get money flowing to jump start infrastructure projects are on the way. Unlike global peers, the People’s Bank of China still has room to cut interest rates. Recently announced efforts also include a tax cut for vehicle purchases and a reduction in the minimum down payment for first-time home buyers.

"We expect the government to continue to take additional incremental measures to ensure that growth doesn’t deviate too much from its targets," said Louis Kuijs, head of Asia economics at Oxford Economics Ltd. in Hong Kong. "We expect these measures to focus largely on shoring up domestic demand, with probably gradually a greater role for fiscal policy steps outside the infrastructure domain."

The need for added steps to meet Premier Li Keqiang’s 2015 growth target of about 7 percent will escalate as the boost from the banking industry fades.

Financial Boost

The financial industry surged 16.1 percent in the third quarter from a year earlier despite the Shanghai Composite Index plunging 29 percent. That boost to growth endured in part because trading volume for shares in the benchmark was more than double the same period a year earlier, even as it fell about 25 percent from the second quarter.

Because stocks started soaring in the fourth quarter of 2014, a higher base effect looms for the final three months of this year. That makes it all the more urgent to boost the flagging industrial and construction sectors if Premier Li’s growth goal is to be achieved.

Economists from Macquarie Group Ltd. to Nomura Holdings Inc. are also among those who forecast the government will add to stimulus this quarter.

Monetary Easing

“We continue to expect moderate fiscal stimulus from the central government and continued monetary easing,” Nomura economists led by Yang Zhao wrote in a note Tuesday. The analysts expect one more bank reserve requirement ratio cut this quarter and another four 50 basis point reductions in 2016, together with two more benchmark interest rate cuts of a quarter percentage point each next year.

A weaker nominal growth rate suggests the underlying economy is softer than the
headline growth rate of 6.9 percent in the third quarter, "making the case stronger for more policy easing to come,” according to Macquarie’s China Economist Larry Hu.

That means China could be unleashing fresh stimulus along with some of the world’s biggest economies.

ECB, BOJ

The European Central Bank is forecast by economists to announce additional quantitative easing by the end of the year, according to a Bloomberg survey. Expectations for further stimulus at the Bank of Japan’s Oct. 30 policy meeting, according to surveys by Bloomberg, are higher than for any meeting since Governor Haruhiko Kuroda unexpectedly added to the bank’s easing policy in October 2014. 

That’s at a time when the U.S. Federal Reserve is considering the opposite policy move by lifting interest rates from historic lows in what would be the first tightening since 2006.

Together, the combined easing would help lift global sentiment, increase investor risk appetite and more than offset any Fed rate rise, according to David Mann, Singapore-based chief economist for Asia at Standard Chartered Bank.

"It doesn’t mean we’re going to get a sudden turnaround and a huge boom, but you would at least get a lot more confidence that central banks are on the case," Mann said. "If all three were easing at the same time it would easily counter the effect of the Fed."

Fiscal Room

The PBOC has already cut interest rates to record lows and reduced banks’ reserve requirement ratios. The one-year lending rate has been lowered to 4.6 percent and the one-year deposit rate is at 1.75 percent.

The government also has relaxed rules for local authorities to borrow, and the top economic planning body has stepped up project approvals. The government’s strong balance sheet also means funds can be released to state level authorities to fund more infrastructure projects if needed.

Growth in the financial industry still has a “significant distance to fall,” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a report Tuesday, narrowing the options for policy makers.

“With the equity boom accelerating financial-sector output from the fourth quarter of 2014, the base for growth in the quarters ahead will be more challenging,” Orlik and Chen wrote. “China’s government will either have to accept that will take headline GDP further from its 7 percent target, or continue to ratchet up public spending in the months ahead.”

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