Download China`s Economy Policy Stimulus in Action

INVESTMENT TALKS
China’s Economy
Policy Stimulus in Action
23 July 2012
How do you evaluate China’s recent GDP data?
It confirms a downward trend in growth, but hardly supports a scenario of “hard
landing”. Admittedly, China’s economy expanded 7.6% year over year in the second
quarter, marking the sixth straight drop and a near-halving compared to the cycle peak of
Q1 2010. The reason why investors welcomed the news is that the slowdown looks still
moderate compared to what happened in 2008. What is more important is that the
Chinese officials appear to be ready to step up their expansionary policies both on the
monetary and fiscal side.
Mauro Ratto
Head of Emerging Markets
What concrete measures have been taken to stimulate growth ?
The People’s Bank of China (PBOC) has focused on stimulating economic growth since
last year, due to concerns about slowing economies in Europe and the US.
We think it was timely enough to switch policy after focusing on fighting inflation for
about two years. The second-quarter GDP report came on the heels of a rate cut fully
consistent with this new policy. This policy action is likely to proceed apace, as risk
scenarios such as the EMU debt crisis remain a threat.
Admittedly, the Chinese economy is not threatened by a conventional recession
(meaning GDP shrinkage). But a sharp slowdown would seriously hurt other economies
and would not be welcomed by a political class that is going through a generational
change.
What is to be done next?
The work is barely half-finished. Rate cuts are thus poised to continue and they may not
be the only tools available to revive the credit market and give the economy a boost.
The PBOC has been lowering the banks’ reserve ratio well before starting to cut rates.
Both policy rates and the reserve ratio may need to come down jointly, if economic
indicators do not improve any time soon.
Close attention will be paid to manufacturing indices, which are closely related to the
global economy, notably to the purchasing manager index:: this is still far above the crisis
levels of 2008 but nonetheless is worth monitoring as the downward trend consolidates
and its level is close to the expansion threshold of 50.
What are investors making of these policies?
Chinese officials look more confident than financial markets, whose concerns over a hard
landing rarely recede. Investors appear to show renewed confidence when they hear good
news also from other major regions. US economic and corporate data seems to provide
additional support when they are upbeat.
Last week’s positive reaction to Chinese data was probably favored by positive evidence
on corporate earnings, notably by a leading bank such as JP Morgan, which reported
good second-quarter earnings thanks to reviving lending to businesses and this should be
a sign of a buoyant economy.
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INVESTMENT TALKS | China’s Economy: Policies Stimulus in Action
July 2012
Does investors’ caution seem justified?
Other regions are still a matter of concern and here the EMU debt crisis hangs over again.
If the global scenario is more mixed, investors remain pretty cautious over China’s ability
to stimulate growth.
However, we believe that other measures recently adopted by Chinese officials are worth
mentioning as they aim at increasing the contribution of domestic demand to GDP
growth. The long-run potential for this structural change is high and should be made
easier by the steady growth of the middle class. Making the economy less export-oriented
appears wise, as Europe's problems have already weighed down on China’s exports and
threaten to do the same over the coming quarters, should a recession grip peripheral
EMU countries in the wake of the sovereign-debt crisis.
So what are the implications of your views?
We are mindful about increased volatility in the summer season, but the scenario we
envisage makes the case for an overexposure to Chinese markets along with the rest of exJapan Asia.
We still believe in a soft landing of the Chinese economy, with GDP growth bottoming
out at 7-8% and then picking up again as policy makers use all levers to prevent a sharp
slowdown. Most remarkably, China has ample room for fiscal easing, unlike most
developed countries, and this kind of stimulus may help the economy move back to a
faster track. In the last decade, while the developed countries accumulated debt, emerging
markets exhibited a diametrically opposite trend. Back in 2000, based on IMF sources, the
debt / GDP ratio for developed economies was 73% versus 49% in emerging economies.
As of last year, the gap has continued to increase: the developed economies posted a ratio
of 104% compared to 36% for emerging economies.
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Date of First Use: 23 July 2012
For Broker/Dealer Use Only and Not to be Distributed to the Public.