China: Additional Fiscal Stimulus if Needed

Published on September 17, 2015

China’s wild equity market has settled into a modicum of (relative) calm after its elliptical run-up through June followed by the violent crashes of July and August. That has been in part a result of intervention and policy stabilization measures taken by the central government both in the equity and currency markets, a cut in RRR rates, and prospects for some additional fiscal spending (see SGH 9/8/15, “China: New Stability and Stimulus Measures”).

 

In addition, despite overwhelming negativity by foreign investors over prospects for the Chinese economy, there has been mixed economic data showing some degree of resilience in non-manufacturing sectors, such as retail sales, in contrast to an industrial sector that is in a managed, albeit painful, secular decline.

 

*** In spite of assurances by Premier Li Keqiang and the State Council over the state of China’s economy, President Xi Jinping nevertheless remains cautiously concerned from what we understand, and has requested that his top economic officials come up with suggestions for possible additional stimulus measures above and beyond the fiscal expenditures already planned for the remainder of 2015 – just in case. ***

 

*** While Beijing has been and continues to be loath to open the spending taps on the massive scale that was needed to counteract the post-Lehman crash and Great Recession of 2008, one suggested form of stimulus that we understand may resonate is on the tax cut side – namely allocating another 1 trillion Yuan in structural tax reductions. Such a measure is seen as not only effective in promoting growth, but as importantly, can be targeted to promote the restructuring of the economy consistent with the long term goals of the Central Committee leadership. We believe these additional tax cuts could, if needed, be put on the table in October. ***

 

Focus on Economic Fundamentals

 

While another cut in the RRR remains an option for later in the year, further monetary easing is not under immediate consideration given sensitivities over outflows and the struggles of managing excessive currency volatility and weakness.  The preferred vehicle for additional stimulus, for now at least, appears to remain on the fiscal side.

 

In the meantime, while Chinese authorities will continue to intervene on occasion to avert systemic risk from fluctuations in the equity markets, the focus of the allocation of additional resources will remain on the stabilization of the fundamentals of the economy, and not daily interventions in the stock markets.

 

Indeed, there is an open acknowledgment among senior economic officials that the equity market has and may even still to some extent reflect a bit of a Wild West mentality. And while the government will and should step in to stem panic that could threaten the prospects for real economic growth, the markets are to a large extent separated from real economy activity, and they believe the gyrations to date have not significantly dented growth either way.

 

Of course in the near term, from a political and signaling perspective, Beijing has no intention of allowing a crashing stock or currency market to distract from President Xi’s upcoming state visit to the United States and the IMF meetings at the end of September.

 

On his way to Washington DC, and eventually the Oval Office to meet with President Barack Obama, Xi will stop by the West Coast to check in with long-time confidante, former Treasury Secretary Hank Paulson, followed by a private dinner hosted by Microsoft Chairman Bill Gates at his residence.

 

For what it’s worth, Chinese officials at least continue to appear to have a rather acute understanding of the true power structure of the United States capitalist system.

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