China: A Tap, not a Tightening

Published on May 17, 2016

Investors are struggling to interpret the data release from the People’s Bank of China last Friday that showed a surprise drop in new loans to 555.6 billion yuan in April from 1,370 billion in March and the market median estimate for 800 billion yuan.

Foremost among their questions is whether that deceleration was the result of deliberate policy guidance or not, especially in light of the interview last week in the People’s Daily with an anonymous senior official warning among other things of excess leverage and credit growth, an “interview” that as we wrote, should be ascribed to President Xi Jinping himself (see SGH 5/10/16, “China: Message from Above”).

It is not.

*** Senior Chinese economic officials expect the sharp drop-off in new loan growth last month to be temporary, even after taking into account the special factors – namely an acceleration in local government debt swaps, which stood at no less than 350b yuan – that have been cited by the People’s Bank of China officials to publicly explain those figures. Indeed, they expect new loan growth to end back up at around 950 billion to one trillion yuan in May. ***

*** The State Council and PBoC will nevertheless keep existing monetary policy unchanged through the remainder of the second quarter, meaning the PBoC will inject cash when needed through open market operations into the banking system and is not expected to resort to any additional RRR, or certainly not interest rate, cuts. They will set the Renminbi central parity rate to “reflect market developments more consistently,” but expect the currency will likely remain stable within the 6.4500 to 6.5500 region for the remainder of the month, and perhaps subsequently drifting to the 6.5000 to 6.6000 range. ***

Color on Weekend Economic Data

Senior economic officials also shared some color and feedback around the generally weaker than expected Industrial Output and Fixed Asset Investment figures for April that were released over the weekend.

The Industrial Output figures showed a relatively sharp drop from 6.8% in March to 6.0% in April. While that number was without a doubt below market expectations for a 6.5% print, officials do not see it as particularly alarming, reminding that 6% is actually the government’s target rate.

They also note that if output had actually been maintained that above target growth rate of March, it could have been interpreted as a lack of progress in Beijing’s stated goal of reducing overcapacity – one the key five “must-do tasks” that have been laid out for supply-side reform (SGH 5/10/16, “China: Message from Above”).

Where Chinese officials do remain somewhat concerned is in the fixed-asset investment numbers, even though they came in closer to market expectations.

Indeed FAI has increased at a pace of 10.5% in the first four months of the year, exactly hitting the government’s target of 10.5%. But they note that pace of growth has come only through a substantial increase in FAI by state-owned firms, while private sector FAI has decelerated to its slowest pace since at least 2012.

Beneath the headline figures, investment by private firms rose only 5.2% year on year through the first four months of 2016, whereas fixed asset investments by state owned firms jumped by 23.7%. Officials concede that without strong private investment there cannot be strong continuous growth, and the State Council and all levels of local government will look to take measures to encourage private sector investment to boost its growth rate to 8-10% for the second half of the year.

More broadly, government officials expect overall April data to show some improvement over March figures. They point, for instance, to a surprise year on year jump of 14.4% in fiscal revenues in April, which was significantly higher than the 7.1% in March, the 6.3% in January and February, and 5.8% for all of 2015.

The five tasks of supply side reform have, of course, yet to be completed, and as the central government has reiterated it as a priority, and pledged tax cuts to lower the cost of business in all sectors. So officials expect as a consequence that fiscal revenue growth will return to the 5-7% range for the remainder of the year, or around 5% for 2016.

And finally, the Ministry of Finance has issued 2 trillion yuan of debt swaps as of May 10 to help defuse (or subsidize) local government debt risk. That is not the end of the program, and the MOF is planning to issue more than 3 trillion CNY in additional local debt swaps in the future.

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