Premier Li Keqiang recently chaired three high level meetings – special meetings of the State Council and the State Council’s Executive Body – to reassure jittery local officials and outline policy measures that are being prepared to ensure Beijing meets its economic targets, and in the process stabilizes markets.
Proposed Stimulus and Stabilization Measures
*** Beijing will pump nearly 900 billion yuan (equivalent to around $140 billion, or 1.25% of China’s estimated $11 trillion GDP) of fiscal stimulus programs into the real economy for the remainder of the year, from September to December of 2015. To put that stimulus in context, that represents an increase of 620 billion yuan over the same period last year. ***
*** In addition, the Ministry of Finance will more than double swap lines for local governments to convert maturing high cost debt into lower interest municipal bonds from the pace of issuance so far this year, from 1.8 trillion yuan in swaps issued in the first eight months of 2015 to 1.4 trillion for the remainder of the year. Beijing will also provide 175 billion yuan in tax breaks and set up a 60 billion yuan fund focused specifically on Small and Medium Enterprises (SMEs). ***
*** The People’s Bank of China will furthermore ensure monetary liquidity through the maintenance of a generous quota and pace for new loan issuance, setting a minimum of 3.2 trillion yuan in new loans for the remaining four months of the year on top of the 2.35 trillion yuan issued from July – August. ***
*** As was repeatedly emphasized to G-20 counterparts last weekend, and as we wrote in the tumultuous immediate aftermath of the CNY devaluation of August 11, China’s leadership will also continue to hammer home the desire for a stable exchange rate, and stress there is no real economic basis for a sustained depreciation of the Renminbi (SGH 8/12/15, “China: A Market Managed Devaluation”). Maintaining a stable FX regime, despite market concerns over the almost $100 billion reportedly spent on intervention over the last month alone, remains a top priority, not least of all before the IMF meetings and Oval Office summit between Presidents Barack Obama and Xi Jinping later this month. ***
*** Chinese officials acknowledge the challenge in controlling depreciation pressures on the currency, especially on the unregulated offshore Yuan market, including spending as much as $8-9 billion in one day’s worth of interventions alone. But they do expect this pressure to abate, and will continue to manage the onshore rate closely through the remainder of 2015. ***
*** Indeed we believe the RMB parity rate may be allowed to settle around 6.3000 in time for the IMF meetings at the end of the month, with the onshore spot rate trading about 6.2800-6.3200 around that, or approximately 0.75% stronger than current levels. ***
*** When it comes to the volatile stock markets, despite a desire to remove some of the policy and regulatory “moral hazard” that has fueled the equity bubble and a stated intention to allow markets to trade more freely, China’s State Council, working through the Chinese Securities Regulatory Commission will, as we have maintained, still reserve the right and continue to intervene to support markets on occasion, including when necessary to maintain systemic stability. ***
*** Indeed, China’s leadership remains committed to economic policies they hope will establish a “slow bull” market trend back into Chinese equities. ***
Growth not Collapsing
Chinese officials continue to stress and believe concerns over a hard landing are exaggerated, and point to growth and stability in services, consumption, housing, IT, and the renewable energy sectors, even as the manufacturing sector that has traditionally been the focus of analysts – including especially through the trade and PMI numbers – shows a secular readjustment and decline.
And as we have written they have indeed been expecting economic data and activity through the rest of the year to support this assertion and show some stability and recovery from the summer doldrums, setting the economy on a path to hit their more or less 7% GDP target for 2015.
They now point to signs of stability or rebound in the following measures as early indicators of just that: CPI, value-added industrial output, fixed-asset investments, retail sales, railway freight, and power usage figures.
And despite the severe turmoil just experienced in markets, the National Development and Regulatory Commission expects this recovery trend to continue through the rest of the year.