Download A tale of two stimuli: Comparing the 2015 and 2008 packages

Mizuho Securities Asia Ltd
Economics Research
8 May 2015
A tale of two stimuli: Comparing the 2015
and 2008 packages
Jianguang Shen
[email protected]
+852 2685 2022
Michael Luk
[email protected]
+852 2685 2155
 The 100bp cut to the RRR – only the second on record – clearly showed that the
pace of China’s policy easing has accelerated. Going forward, a full list of easing
tools is ready to launch. The question becomes: Will the 2015 stimulus be a
replica of the 2008-09 version?
 We believe that there are several similarities between the two packages: 1) the
scale of this stimulus will be as large as the previous one; 2) infrastructure
investment will feature prominently; 3) monetary policy easing will be
aggressive; and 4) the consequences may be uncertain.
 However, important differences in the packages include: 1) bank loans for
financing the stimulus depend more on the stock market than on local
government borrowing; 2) leveraging the government balance sheet by
increasing central government debt, thus reducing the local government debt
problem; 3) replacing domestic investment with investment in New Silk Road
countries, particularly Pakistan and Indonesia; and 4) employment conditions
being more resilient.
 We believe the stimulus needs to be coupled with government reforms to
increase spending efficiency and that stock market volatility may be a challenge.
However, as the easing measures gain traction, China’s GDP growth should
moderately accelerate to 7.1% YoY in 2Q15 and then be followed by additional
government spending in 2H to take full-year GDP growth to 7.2% YoY. The
question remains: What will happen after this stimulus?
See important analyst certification and disclosure information beginning on page 21.
Economics Research
Another massive stimulus in the making
Policy easing accelerated in April
The massive RRR cut on 19 April clearly showed that the pace of China’s policy easing has
accelerated. At 100bp for all banks and more for selected banks that lend to small
enterprises, the agricultural sector and fiscal infrastructure projects, this RRR cut was the
deepest since December 2008, when China was in the nadir of the global financial crisis.
Back then, the government also launched a massive economic stimulus program to lift the
economy from concerns about a deep recession.
Fig 1 100bp RRR cut on 19 April marks the beginning of another massive stimulus
Required reserve ratio
22
20
%
18
16
14
12
10
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Large financial institutions
Small and medium-sized financial institutions
Apr-13
Apr-14
Apr-15
Rural cooperatives
Rural commercial banks
Source: CEIC, Mizuho research
The current stimulus started with the first interest-rate cut in November 2014 (see An interest
rate cut after a long wait, 24 November 2014) followed by a general RRR cut on 4 February
(see Further thoughts on RRR cuts, 5 February). The pace of easing accelerated in April
ahead of the announcement of 1Q15 GDP, when Premier Li Keqiang said that the
government was ready to step up to cope with the increasing downward pressure on the
economy.
Fig 2 The easing started with the first interest-rate cut in November 2014
8
7
6
%
5
4
3
2
1
Mar-07
Mar-09
Mar-11
1-yr deposit rate
Source: CEIC, Mizuho research
2
Mar-13
1-yr lending rate
Mar-15
Economics Research
Economic conditions deteriorated in 1Q15
Indeed, the slowdown was evident in the 1Q15 GDP, which grew 7.0% YoY in real terms and
5.8% YoY in nominal terms. The value-added of industry (VAI), which plunged to 5.6% YoY in
March, suggests further deterioration of the economy (see New stimulus to emerge amid
further slowdown in the economy, 15 April).
Fig 3 Nominal GDP growth slowed notably to 5.8% YoY in 1Q15
GDP grow th
25
10
8
15
6
10
4
5
2
0
0
-5
YoY%
YoY %
20
-2
Mar-09
Mar-10
Mar-11
Mar-12
Deflator (RHS)
Mar-13
Nominal
Mar-14
Mar-15
Real
Source: CEIC, Mizuho research
Fig 4 Sharply lower VAI in March showed the economy is still deteriorating
12
15
11
10
9
5
8
0
YoY %
YoY %
10
7
-5
6
5
Mar-12
Sep-12
Mar-13
VAI
Sep-13
Mar-14
Sep-14
Electricity production (RHS)
Source: CEIC, Mizuho research
3
-10
Mar-15
Economics Research
Indeed, our Li Keqiang Coincident Index suggests that the economy deteriorated significantly
during the quarter, and the pace of deceleration exceeded that captured by the official GDP
growth figure (see The widening gap between official GDP and supporting data, 27 April).
Fig 5 LKQ Index fell to its lowest point since 2012, despite significant support from the stock market
LKQ index
25
20
YoY %
15
10
5
0
-5
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Source: CEIC, Mizuho research
Fig 6 Railway freight slowing by more than outgoing shipments
25
20
YoY %
15
10
5
0
-5
-10
-15
Mar-10
Mar-11
Mar-12
Railway freight
Mar-13
Mar-14
Container throughput
Mar-15
Source: CEIC, Mizuho research
Fig 7 Industrial-electricity consumption fell 3.4% YoY in March
40
35
30
YoY %
25
20
15
10
5
0
-5
Mar-10
Mar-11
Mar-12
Government revenue
Source: CEIC, Mizuho research
4
Mar-13
Mar-14
Industrial electricity consumption
Mar-15
Economics Research
A full list of easing tools ready to launch
We believe that the government has begun a new round of stimulus. At the Politburo meeting
on 30 April, the leadership pledged to implement further measures to support the economy,
involving eight key areas: tax reduction, investment in major infrastructure projects, monetary
policy, increased consumption, healthy development of the property market, innovation, SOE
reform and the Beijing-Tianjin-Hebei metropolitan area (see First sign the economy is
stabilizing, 4 May).
Specifically, President Xi Jinping promised that rural residents would receive more equitable
policy treatment. For example, restrictions on migrant workers because of their hukou
(residence registration) will be removed. Barriers for the private sector will also be lifted to
increase competitiveness and innovation in the economy, which should lead to further growth
through improved efficiency. In our view, the RRR cut is only the beginning of additional
easing measures across spectrum (see Economics Weekly (19): China’s toolbox for
stimulating the economy, 17 April). .
Plenty of room to ease monetary policy further
On monetary policy, we maintain our call of two more interest-rate cuts and four more RRR
cuts in 2015. Due to relatively tame inflation, the real interest rate actually rose in early 2015,
and the PBoC made further liquidity injections through its open market operations (see The
timing is right for the PBoC to cut interest rates again, 1 March). We believe that
policymakers have plenty of room to ease monetary policy further. In addition, the PBoC has
also injected over CNY800b through targeted measures such as its medium-term lending
facilities (MLF) and standing lending facilities (SLF).
Fig 8 Substantial liquidity injection through SLF and MLF in March
800
700
CNYb
600
500
400
300
200
100
0
Jun-13
Sep-13
Dec-13
Mar-14
SLF
Jun-14
Sep-14
Dec-14
Mar-15
MLF
Source: CEIC, Mizuho research
Multiple areas need fiscal infrastructure spending
On the fiscal side, infrastructure spending has again stepped up to fill in the gap through
additional investment. The National Development and Reform Commission (NDRC) has
accelerated its infrastructure-project approval process, emphasising technological
advancement, structural upgrades and specific local infrastructure.
The Ministry of Housing and Urban-Rural Development, the Ministry of Water Resources,
and the Ministry of Environment Protection have also respectively announced investment
plans for urban pipelines, hydro-engineering projects and water treatment projects that
amount to around CNY3t in investment.
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Fig 9 Fiscal investment stepping up to fill in the gap
FAI
24
20
22
10
20
0
18
-10
16
-20
14
-30
12
-40
10
-50
Mar-12
Sep-12
Mar-13
Railway
Sep-13
Mar-14
%YoY YTD
%YoY YTD
30
8
Mar-15
Sep-14
Real estate investment (RHS)
Source: CEIC, Mizuho research
Boosting domestic consumption by improving market competitiveness
On 28 April, Premier Li Keqiang announced the government would: 1) reduce tariffs on
popular imported goods; 2) launch reforms on the consumption tax system to reduce the levy
on everyday items; 3) establish more duty-free shops and widen the selection of
merchandise and a reasonable quota for duty-free shopping; 4) streamline the inspection
and declaration requirements for imported goods; and 5) improve the image of made-inChina products by reinforcing the crackdown on counterfeit products, so that consumers can
purchase high-quality products at home (see Import duties reduced to boost consumption,
30 April).
In our view, these measures will: 1) boost China’s domestic consumption of popular daily
products; 2) return some Chinese overseas spending to the home market, as shoppers will
likely prefer the convenience of purchasing familiar imported products at home; 3) pressure
domestic producers to provide trustworthy daily products, medicine and infant products in
particular; and 4) reduce China’s service trade deficit. These are all important areas of
China’s structural reforms.
Fig 10 72% of Chinese tourist spending is on shopping
China tourist spending
Mainlander travel destination
45
40
Hotel
12%
35
%
30
25
Dining
9%
20
15
Shopping
72%
10
Entertainm
ent
Tour
3%
0%
Others
4%
5
0
Hong
Kong
2008
Macao
2009
South
Korea
2010
Taiwan Thailand Japan
2011
2012
2013
2014
Source: CEIC, Mizuho research
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Fig 11 Returning consumption helps reduce China’s service trade deficit
Current account
12
500
10
400
8
300
6
200
4
100
2
0
0
% of GDP
USDb
600
-100
-2
-200
-4
-300
-6
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Goods
Services
Income
Current transfer
CAB as share of GDP (RHS)
Source: CEIC, Mizuho research
Property market easing accelerated following the NPC
Since the National People’s Congress (NPC) in early March, the property market also
received arguably its biggest policy booster since 2008. On 30 March, the PBoC slashed the
down-payment requirement to purchase a second home to 40% from 60-70%. At the same
time, the MoF announced that home sellers would be exempt from a 5.6% transaction tax if
they had owned the property for at least two years (see Supply-side stimulus for property
sector to support the economy, 31 March). We found that the contraction in floor-space sold
began to improve in March.
Fig 12 Property market received arguably its biggest boost since 2008, following a slow recovery
20
40
15
10
30
5
20
0
10
-5
-10
0
YoY% YTD
YoY% YTD
300
Unit (1 Jan 2012=100, 30 days ma)
50
-15
-10
-20
-20
-25
-30
-30
Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15
Floor space sold
250
200
150
100
50
0
Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15
Beijing
Floor space starts (RHS)
Housing transaction
Shanghai
Guangzhou
Shenzhen
Source: CEIC, Winds, Mizuho research
The largest tool is structural reform
Premier Li said at a policy advisory meeting, “the largest tool in the policy tool box is reform”.
The State Council meeting on 15 April required structural reforms to be accelerated in 38
areas, including financial, fiscal and administrative reforms. We also note that the PBoC
promised to complete basic capital-account convertibility this year (see China Development
Forum takeaways (1): the CNY as a new reserve currency, 24 March). We expect the
government to cut red tape further and the bureaucracy to foster business development,
along with SOE reforms in an attempt to improve the efficiency of SOEs and allow private
capital to enter monopolized sectors.
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Economics Research
Supporting the economy through a bullish stock market
We believe the recent rally in the A-share market has received the blessing of policymakers,
given the implementation of new measures such as allowing investors to open multiple Ashare accounts. The China Securities Regulatory Commission’s (CSRC) swift issuing of a
statement on 18 April designed to ease market concerns following its margin-trading
clampdown on 17 April, and the PBoC’s deep RRR cut on 19 April, are both measures to
keep the stock market buoyant, in our view (see Deep RRR cut to boost stock market
confidence, 20 April).
Fig 13 The bullish A-share market may be part of the government’s easing program
Market volume
Shanghai A-share
5,000
1,200
4,500
1,000
CNY b
4,000
3,500
800
600
3,000
400
2,500
200
2,000
Apr-11
Apr-12
Apr-13
Apr-14
0
Apr-11
Apr-15
Source: Winds, Mizuho research
8
Apr-12
Apr-13
Apr-14
Apr-15
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The return of fiscal projects and monetary
easing
Revisiting the 2008 stimulus program
2008 stimulus hastily prepared
On 9 November 2008, the State Council announced a plan to invest CNY4t by end-2010 to
boost domestic growth, in an attempt to minimize the impact on sharply worsening exports
amid the global financial crisis. In addition, the move was part of a dramatic money-easing
policy that was already under way and included three interest-rate cuts in two months and a
100bp RRR cut.
On 6 March 2009, the NDRC released a breakdown of the stimulus, including: 1) CNY1.5t
invested in public infrastructure such as railways, highways, water management and airport
construction; 2) CNY1t for Sichuan earthquake reconstruction; 3) CNY370b invested in rural
development (eg, for the agricultural sector) and a further CNY370b invested for industrial
technology advancement in terms of upgrading facilities in 10 selected industries;
4) CNY210b for sustainable development such as improving the environment and energysaving technology; and 5) CNY150b on educational, cultural and family planning.
The fiscal spending was coupled with aggressive monetary easing, as bank loans shifted into
high gear. China’s bank loans grew to CNY7.37t in 1H09 tripling the CNY2.45t lent in 1H08.
The annualized money-supply growth rate jumped sharply to 26.2% and 30.4% in the first
two quarters of 2009 from 14.9% in 4Q08. We estimate that the additional lending went
predominantly to local-government investment projects that went hand-in-hand with the
central government to boost the final size of the stimulus to close to CNY11t.
Fig 14 M2 jumped to 30.4%YoY in 1H2009
2,000
40
1,800
35
1,600
30
1,400
1,000
20
800
15
CNYb
25
600
10
400
5
200
0
Mar-08
Mar-09
Mar-10
New loan
Source: CEIC, Mizuho research
9
Mar-11
Mar-12
M2 (RHS)
Mar-13
Mar-14
M1 (RHS)
0
Mar-15
YoY%
1,200
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Substantial impact with lasting consequences
The results were dramatic: China’s GDP jumped to 12.4%YoY in 1Q10 from 6.6% YoY in
1Q09, which had been the slowest growth since 4Q01. China’s GDP expenditure growth
remained stable at 9.2% YoY in 2009, due to a sharp 8.1ppt increase in the investment
contribution in 2009 (vs 4.5ppt in 2008), while the external trade contribution contracted
3.4ppt, vs positive growth of 0.8ppt in 2008.
Fig 15 Massive jump in investment kept China from recession in 2009
GDP by expenditure
14
12
YoY %
10
8
6
4
2
0
-2
-4
2007
2008
2009
Consumption
2010
Inestment
2011
2012
Net exports
2013
2014
GDP growth
Source: CEIC, Mizuho research
While the stimulus was successful at keeping China out of recession, its negative impacts
included excess capacity. In order to repay the debt incurred for the rapid capacity
expansion, financial costs in the industrial sector have been rising, leading to depressed
corporate profits and delayed production upgrades (see Will China fall into a liquidity trap? 11
June 2013).
Fig 16 Industrial profit remained downbeat amid rising SOE finance expenses
Industrial enterprise profit
20
3.5
25
3.0
10
20
10
-20
5
-30
2.0
1.5
1.0
0.5
0.0
-40
0
Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15
SOE
% of revenue
15
-10
YoY% YTD
YoY % YTD
2.5
0
2008
2009
2010
2011
Finance expense
Private (RHS)
Source: CEIC, Mizuho research
10
2012
Profit
2013
2014
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The long-term cost of the 2008 stimulus weighed heavily on the economy. Professor Harry
Xiaoying Wu of Hitotsubashi University estimated that official statistics show that China’s
growth in total factor of productivity (TFP) slowed from its best at 4.8% YoY over 2001-07 to
1.3% YoY over 2008-12, due to a significant distortion in the allocation of economic
resources in response to heavy-handed government intervention1. Unwinding the distortion,
therefore, is an important step in China’s sustainable growth.
Fig 17 Total factor of productivity plunged after the massive stimulus
Total factor of productivity gain
6
5
%
4
3
2
1
0
1977-1984
1984-1991
1991-2001
2001-2007
2007-2012
Source: Harry Xu (2014), Mizuho research
Similarities between 2008 and 2015
In our view, there are a number of similarities between the stimulus in 2008 and the current
stimulus: 1) the scale of the current stimulus will be as large as in 2008; 2) infrastructure
investment to again be prominent; and 3) monetary-policy easing will be aggressive.
1) The scale of the current stimulus will be as large as in 2008
So far, the government has announced an extended list of infrastructure spending in 2015.
Nevertheless, the size of China’s economy (CNY63.6t at end-2014) has more than doubled
since 2008. As such, we believe that even as the government’s objective is to keep the pace
of the country’s economic growth on par with its official target of 7.0% YoY, under the new
norm, it is still likely the government will announce more new projects. Thus, the scale of the
current stimulus will likely be as large as the previous one (see Deteriorating economy but
rise in new loans poses a challenge in policy easing, 12 December 2014).
Fig 18 The size of China’s GDP has more than doubled since 2008
Nom inal GDP
70
25
60
20
40
15
30
10
YoY%
CNY t
50
20
5
10
0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Nominal GDP
Growth (RHS)
Source: CEIC, Mizuho research
1
Harry Xu, 2014. "China’s Growth and Productivity Performance Debate Revisited – Accounting for China’s
Sources of Growth with a New Data Set” The Conference Board Economics Working Papers, Vol EPWP14-01.
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2) Infrastructure investment to again be prominent
During the APEC meeting on 9 November 2014, President Xi Jinping said that China’s
economy is in a notable “new norm”, where three main trends merge: 1) the shift to mediumhigh speed growth after more than three decades of exceptional growth; 2) the need to shift
the growth engine to consumption and services instead of investment and manufacturing;
and 3) the negative consequence of the massive stimulus of 2008-09, such as excess
capacity and sizeable debts (see 2015 Outlook: Transitioning towards the new norm, 10 Dec
2014).
Under this new norm, the task of policymakers becomes more complex – ie, balancing
China’s need for structural reforms while preventing a hard landing. As such, we maintain our
view that although the structural reforms are well under way, given that the GDP contribution
from the consumer sector is rising, infrastructure investment will continue to fill the gap to
keep the economy from stalling.
3) Monetary-policy easing will be aggressive
Similarly, the current stimulus will rely on aggressive monetary easing, including loan quotas,
and RRR and interest-rate cuts. Over 2008-15, the PBoC has actually intervened several
times to carefully monitor China’s liquidity conditions. We believe that tools such as the SLF,
MLF and pledged supplementary lending PSL will continue to play important roles in China’s
monetary policy.
Nevertheless, we also believe that targeted policy tools are merely “second-best” options in
monetary policy. China’s RRR at 18.5% is still one of the highest rates in the world. We
maintain that RRR cut must continue, as: 1) interest-rate liberalization has accelerated and
price-based tools allow more efficient resource allocation in the market; 2) current market
conditions are distorted due to onerous banking-sector control; 3) the current RRR at 20%,
exceeds its optimal level as a policy tool; and 4) China’s RRR is much higher than global
standards (see Why the PBoC has to cut the RRR, 7 May 2014). In addition, ongoing
deflationary pressure is also keeping the real interest rate too high for economic growth (see
The timing is right for the PBoC to cut interest rates again, 2 March).
Fig 19 Real interest rates remain too high to be supporting growth
10
8
6
%
4
2
0
-2
-4
-6
Mar-01
Mar-03
Mar-05
Mar-07
Deposit rate:one year
Source: CEIC, Mizuho research
12
Mar-09
CPI:YoY
Mar-11
Mar-13
Real interest rate
Mar-15
Economics Research
2015 stimulus vs the 2008 version
Nevertheless, we do not believe the 2015 stimulus will replicate the massive stimulus
package in 2008-09. NDRC Chairman Xu Shaoshi said at the NPC in early March that policy
easing in 2015 will be more gradual with carefully calibrated measures and designed to
simultaneously stabilize growth, adjust the economic structure and promote economic
efficiency.
Emphasis on the stock market for fund-raising
Progressing towards direct investment
In our view, the most important factor that sets the two stimuli apart is the dependence on the
stock market to finance the stimulus this time rather than bank loans as was the case in
2008. On 18 April, Premier Li Keqiang reiterated that the government plans to promote direct
financing to support financial needs in the real economy. Specifically, the stock market will
soon switch to a “registration system” for initial public offerings (IPO) in order to minimize the
administrative burden in the equity-listing process.
Fig 20 China’s Stock market holds great potential for direct fund-raising
500
Capital raised in A-share m arket
450
400
CNY b
350
300
250
200
150
100
50
0
2006
2007
2008
2009
IPO
2010
2011
2012
2013
2014
Secondary offering
Source: CEIC, Mizuho research
At the China Development Forum, the government suggested such moves were part of its
financial reforms (see China Development Forum takeaways (1): the renminbi as a new
reserve currency, 24 March). To this point, the economy has relied on indirect financing
methods such as loans, because the country’s financial markets were underdeveloped and
China has a high rate of household savings.
Problems arising from bank loans and local government financing
The emphasis on the stock market is also a partial response to rising constraints in the
financial market. China’s financial system is now under strain due to a legacy of rapid debt
expansion since the 2008-09 stimulus, in both the official banking system and the shadowbanking sector.
First, the rapid release of lending led to a retreat in 2009 from the prudent banking practices
that the government had carefully nurtured for the 10 previous years. For example, the
Industrial and Commercial Bank of China released over CNY250m in loans in the first two
months of 2009 – nearly half of its annual lending quota. Such an unprecedented pace of
lending taxed the banks’ capacity to conduct due diligence on loans before releasing the
funds. The non-performing loan (NPL) ratio at Chinese banks has been increasing since mid2012.
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Fig 21 NPL is rising in China
2.8
750
2.6
700
2.4
650
2.2
600
2.0
550
1.8
500
1.6
450
1.4
400
1.2
350
1.0
300
Dec-08
Dec-09
Dec-10
Dec-11
Amount
Dec-12
Dec-13
%
CNY b
Non-performing loan
800
0.8
Dec-14
NPL ratio (RHS)
Source: CEIC, Mizuho research
Second, China’s shadow-banking system flourished after the government’s 2009 stimulus
package partly because Local Government Financing Vehicles (LGFVs) sought alternative
financing sources after the supply of money arranged through bank loans was insufficient to
meet their demand. This culminated into the State Council releasing “Document 107” at end2013 (see 10 questions on China’s shadow banking, 9 Jan 2014). Consolidation of shadow
banking system is still ongoing as policymakers’ attention for financing turns back to targeted
bank loans such as pledged supplementary lending (PSL) (see Monetary easing evident in
loan data, 14 April).
Fig 22 The shadow banking system is primarily an invention after the 2008 stimulus
Total social financing
3.0
2.5
CNYt
2.0
1.5
1.0
0.5
0.0
-0.5
Mar-08
Mar-09
RMB loan
Mar-10
Entrusted loan
Mar-11
Trust loan
Source: CEIC, Mizuho research
14
Mar-12
Mar-13
Bankers' acceptance note
Mar-14
Mar-15
Bond and equity
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Fig 23 The portion of bank loans in local government debt has declined as other forms of financing flourished
Source of local government debt (End-2010)
Source of local government debt (June 2013)
Direct
Delayed
Personal
payment financing
Others
3%
loan
3%
1%
6%
Personal
loan
14%
Bond
issuance
8%
Trust
7%
Account
payable
7%
Senior level
government
3%
Bank loan
75%
Bank loan
51%
Bond
issuance
11%
Build-totransfer
11%
Source: CEIC, Mizuho research
Reducing financial risk through government debt reshuffling
Local government’s direct debt liability has expanded to CNY16t
The China News, an official media agency, reported that as of end-2014, the total debt that
local governments are directly liable for totalled around CNY16t. Previously, the National
Audit Office had reported that as of mid-2013, local governments were directly liable for
CNY10.9t of debt. This suggests a nearly 30% YoY annualized increase between mid-2013
and end-2014 (see Snapshot of local government debt reflects the need for expansion of
swap program, 27 April).
Fig 24 Rising debt with direct liability could be the result of the transfer from other levels of responsibility
Local government debt
20
18
16
CNY t
14
12
10
8
6
4
2
0
Total
End-2010
Direct liability
End-2012
1H 2013
Guarantor
Potential liability
End-2014 (est.)
Source: CEIC, Mizuho research
This amount (not yet confirmed by the MoF) is the latest estimate after the 5 January
deadline ending the implicit government guarantee that was given to local governments. We
believe the increase is a result of past under-reporting, as local governments now must fully
declare their debts in order to receive a government guarantee of repayment. This is part of
the central government’s finance restructuring, as outlined in the new budget law (see The
end of implicit guarantees for local government debt? 5 Jan).
Shifting high leverage from local to the central government balance sheet
As the central government set a limit to its implicit guarantee, it also began to lower the risk
of the maturing local debts. The MoF has reportedly approved a debt replacement program
that would allow CNY1t in existing local government debt to be replaced by local government
bonds. This will come as a relief to local government finances in the near term – high-yield
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debts that are classified as the government’s responsibility can be replaced by long-term,
low-yield bonds backed by the central government (see The end of implicit guarantees for
local government debt? 5 Jan). We believe the Ministry may expand the quota to CNY3t by
end-2015.
Fig 25 The debt-swap program helps to reduce the immediate need for repayment
Debt repayment deadline (June 2013)
2018 or later
2017
2016
2015
0
500
1,000
Potential liability
Guaranteed
1,500
2,000
2,500
Direct liability
Source: CEIC, Mizuho research
While Finance Minister Lou Jiwei said that China’s government debt remained below 40% of
GDP at end-2014, he acknowledged that the debt burden at some local governments was
much higher. The debt replacement program may help reduce the overall risk associated
with the local-government debt problem by shifting the leverage from local governments’
balance sheets to that of the central government.
In addition, fund raising in the stock market will: 1) allow corporates and LGFVs to repay
maturing debts and reduce their financial leverage; 2) increase the household sector’s
holding in state assets as a part of China’s SOE reform (see China's bold reform plan
positive for long-term growth, 18 Nov 2013); and 3) controlling the overall stress on China’s
financial system by shifting the balance sheet between economic sectors. Specifically, we
expect the financial leverage of the household sector to increase, while that of the corporate
sector and local government declines.
New Silk Road initiative creates demand for both domestic and
overseas spending
We believe the central government has taken a leading role in the 2015 stimulus to prevent
redundant spending on “hot industries” that led to excess capacity and negative returns,
rather than leaving it to local governments as it did in 2008,. While investment is again going
to be an emphasis of the stimulus program, part of this will occur overseas as a part of the
New Silk Road initiative (see China Economics Weekly (17): “New Silk Road” strategy - a
new form of stimulus, 2 April).
The initiative aims to connect China with external markets by the historical land and maritime
trade route, and introduces a plan for infrastructure spending. Already, the government has
signed infrastructure construction contracts with Afghanistan and Pakistan, as well as forging
new ties with Indonesia.
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Economics Research
Fig 26 The New Silk Road to increase China’s outward direct investment to countries along the route
Source: Xinhuanet, Mizuho research
In our view, the New Silk Road projects will enlist an extensive list of Chinese construction
companies and machinery manufacturers, in addition to creating strong demand for Chinese
workers. The projects should provide fresh sources of demand for Chinese products such as
machinery and heavy equipment, which have been burdened by excess production capacity
since the massive government stimulus of 2008-09. In addition, the new Silk Road initiative
is a breakthrough to creating a greater presence for China in international financial markets
and additional outlets for its massive reserves (see Economics Weekly (17): “New Silk Road”
strategy - a new form of stimulus, 2 April).
Fig 27 Projects identified in the “New Silk Road” strategy
Timeline Strategy / sub strategy
Project
Oct 2013 The New Eurasian Continental Construct a logistic center for Kazakhstan at Lianyungang Port of China
Bridge economic corridor
Jan 2014 The Silk Road Economic Belt Connecting many Chinese cities with European one along the China-RussiaEurope and China-Central Asia- Russia-Europe joint freight railways
May 2014 China-Pakistan Economic
Pakistan’s premier attended the opening ceremonies for a 1,320 megawatt power
Corridor
plant sponsored by China
Nov 2014 China and Europe join sea and China announced the upgrade of Greece’s Piraeus Port with a USD400m
rail express
investment
Sep 2014 The 21st Century Maritime Silk President Xi attended the opening ceremonies for the Port City of Colombo
Road
project of Sri Lana. China promised to invest USD1.4b to build a modern port city
with a business center
Dec 2014 The Silk Road Economic Belt Construct a railway to link Korla in Xinjiang province to Gomud of Qinhai province
to facilitate transportation from eastern China to Central Asia.
Feb 2015 China-Pakistan Economic
A Chinese bank provided a USD100m loan to support a wind-power electricityCorridor
generation project in Pakistan
2015
The New Eurasian Continental Upgrading Kazakhstan’s logistic center at Lianyungang Port in China
Bridge economic corridor
2015
The New Eurasian Continental Build a China Kazakhstan border cooperation center and additional cooperation
Bridge economic corridor
projects
2015
China-Pakistan Economic
More transportation and energy projects are likely to be conducted in Pakistan
Corridor
2015
The New Silk Road strategy
Establish the Asian Infrastructure Investment Bank (AIIB)
2015
China and Europe join sea and Begin construction of the Hungary-Serbia railway
rail express
2015
the Silk Road Economic Belt China’s foreign minister of confirmed on 28 March that China and Thailand
agreed to link the two countries with high speed railways
Source: Xinhua News Agency, Tencent News, Sina News and others, Mizuho research
17
Notes
Finished
Finished
Under construction
Under construction
Under construction
Under construction
Under construction
Expected
Expected
Expected
Expected
Expected
Expected
Economics Research
Employment market to be steadier in 2015
New jobseeker growth slowing
At the height of the global financial crisis in 2009, a large number of migrant workers
returned home from the coastal manufacturing hubs, as they failed to secure employment
during the hiring season following Chinese New Year. In contrast, we also find that the
employment situation remained more stable in 2015 (see China’s latest labour market
updates, 29 April).
China’s total urban employment increased 3.24m in 1Q (ie, 200,000, or 5.8% less than in
1Q14) because of slowing economic growth. However, the slowdown in employment growth
did not lead to higher unemployment. The number of job seekers also contracted, due to an
ageing population and the impact of the one-child policy of the past three decades. In 1Q15,
there were 5.25m job openings vs 4.69 job seekers (a ratio of 1.12), down 15.7% and 15.1%
YoY, respectively from 1Q14. Thus, despite a reduction in hiring, the supply-demand
dynamics in the labour market remained generally tight at 1.12 in 2015.
Window for less capital-intensive production upgrades
Premier Li Keqiang noted that the objective of growth-stabilizing policies is to keep China’s
employment growth steady. The pace of job creation in 1Q suggests that the economy has a
good chance of creating the 10m new jobs in 2015 that the government projects. As such,
we believe the government will be able to focus on stimulating growth through structural
reform as well as on technological upgrade sand innovation that have relatively less marginal
benefit in terms of job creation.
Fig 28 1Q new urban employment contracted by 5.8% YoY
4,500
20
4,000
15
3,500
10
2,500
5
2,000
1,500
YoY%
Person m
3,000
0
1,000
-5
500
0
-10
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15
New urban employment
Growth (RHS)
Source: CEIC, Mizuho research
Fig 29 Labour market remained relatively tight amid falling supply
Urban labour demand-supply
7.0
1.20
6.5
1.15
Person m
6.0
1.10
5.5
5.0
1.05
4.5
1.00
4.0
0.95
3.5
3.0
0.90
Mar-10
Mar-11
Mar-12
Job opening
Job seeker
Source: CEIC, Mizuho research
18
Mar-13
Mar-14
Labour demand-supply ratio (RHS)
Mar-15
Economics Research
Challenges for the stimulus program
Volatility of the stock market
Bullish stock market generally positive on the economy
As the government turns toward the stock market as a source of direct financing for the
stimulus program, the bullish stock market has the added benefit of the following: 1) retaining
capital in China’s market; and 2) a positive wealth effect among investors.
1) Retaining capital in China’s market
A major breakthrough by the PBoC in 2015 was its pledge to achieve basic capital account
convertibility this year. To achieve this, significant breakthroughs in several areas are
required, specifically: 1) relaxing restrictions on domestic individuals investing abroad;
2) preparing China’s financial markets to be more open to foreign investment; and 3) pushing
for the renminbi to become part of the IMF’s special drawing-right currency basket.
We acknowledge that the PBoC must proceed carefully, given the depreciation of the
renminbi and the large capital outflows in recent months. In particular, its foreign exchange
position fell by CNY222.5b in 1Q15. We believe the recent rally in the A-share market has
received the blessing of policymakers through measures such as allowing investors to open
multiple A-share accounts. Policymakers appear to view the bullish A-share market as a
method of retaining capital within China following capital-account liberalization.
Fig 30 Concerns about capital outflows from China
800
150
600
100
50
200
0
USDb
CNYb
400
0
-50
-200
-400
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Position for FX purchase
Mar-13
Mar-14
-100
Mar-15
FX reserve (RHS)
Source: CEIC, Mizuho research
2) Positive wealth effect among the investors
The government did not hide its intention of supporting the bullish stock market when the
CSRC issued a statement on 18 April to allay concerns that it wanted to end the market rally.
We also believe that the deeper-than-expected required reserve ratio (RRR) cut on 19 April
was partly to keep the stock market buoyant. In our view, this could reflect the government’s
effort to boost the economy through the stock market by means of increased spending from
the wealth effect.
Volatility of the stock market
Nevertheless, stock market volatility suggests that the requirement for equity prices to rise
steadily and slowly to meet economic goals is difficult to accomplish. A bullish stock market
encourages fund-raising in the primary market; however, the implications about speculation
in the secondary market for capital expenditures in the underlying listed companies remains
unclear. The wealth effect on consumption from a buoyant stock market is also weak, at
best, in the experience of the US, at least compared to the impact from rising housing
prices2.
2
Karl Case & John Quigley & Robert Shiller, 2005. "Comparing Wealth Effects: The Stock Market versus the
Housing Market," Advances in Macroeconomics, Berkeley Electronic Press, vol. 5(1).
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Economics Research
In addition, the stock market is efficient at allocating resources only as long as investors are
able to make decisions based on fundamental information about a company’s marginal value
of investment. The system will require high quality disclosure and timely conveyance of
accurate information for the investors.
More efficient policymaking requires government reform
The 2008 stimulus resulted in an inefficient allocation of resources and dubious loan quality.
As the current stimulus also relies on investment projects to boost growth, we are also
concerned about the outcome.
More thoroughly studied infrastructure spending
The excess capacity was created during the 2008 stimulus when capital was indiscriminately
channelled to build production capacity. In comparison, the government has pledged to have
more precise policymaking in 2015 with an emphasis on economic efficiency. As Premier Li
noted during his study trip to the north-eastern provinces on 10 April, the upcoming
infrastructure projects have been thoroughly studied in order to ensure they carry a longlasting positive economic impact. This includes projects designed to be part of the 13th FiveYear Plan slated for release in 2016.
34
32
30
28
26
24
22
20
18
16
14
12
Mar-07
FAI
45
40
35
30
25
20
YoY% YTD
YoY% YTD
Fig 31 Sharply increased FAI in 2008 has led to inefficient spending
15
10
Mar-08
Mar-09
Mar-10
FAI
Mar-11
Mar-12
Mar-13
Mar-14
5
Mar-15
State owned enterprise (RHS)
Source: CEIC, Mizuho research
Realigning officials’ objectives with efficient development
In our view, however, the approval process continues to lack institutional barriers to prevent
excessive spending on extravagant projects. We believe it is important to conduct fiscalsystem reform that realigns the assessment of local government officials and promotes their
ability to create a healthy GDP growth rate, rather than GDP growth alone (see Laying out
the plan for future reforms – Takeaways from the Mizuho macro day, 21 January 2013). The
transparency and accountability of local government finances must also improve. Economic
efficiency can be better achieved through joint operation with Public-Private Partnership. The
issue of local government bonds related to specific projects could also increase the
requirement for project disclosure for ongoing monitoring.
Still challenging to hit the official growth target
We believe the stimulus package will have no problem keeping China’s GDP growth at
above 7.0% YoY in 2015, meeting the official target. This is especially as the easing has few
constraints from inflationary pressure, with the producer price index falling for the 37th
consecutive month. In fact, we believe policy easing is starting to affect China’s economic
condition, and this may lead to steadier momentum in 2Q15.
We expect that a2s the easing measures gain traction, China’s GDP growth will accelerate
moderately to 7.1% YoY in 2Q15, followed by additional government spending in 2H, taking
full-year GDP growth to 7.2% YoY (vs our previous GDP forecast of 7.0%), in response to the
government’s determination to support the economy.
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Economics Research
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Price objective
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12.9
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11.8
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7.7
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