China Vows To Refrain From "Mega Economic Stimulus" As 'Two Sessions' Begins

The US has Jeff Sessions, but China is about to have "two sessions".

Starting Sunday is a two-week period of heightened political discourse, if not exactly debate, among the top echelons of China's Politburo, also known as China's "two sessions."

The China People's Political Consultative Conference (CPPCC) starts on March 3 and will conclude on the 13th. The National People's Congress (NPC) will start on March 5 and last until the 16th. On March 5, Premier Li Keqiang will announce 2017 economic targets (e.g., GDP growth and CPI) and policy measures including fiscal and monetary policy (e.g., on-budget deficit, M2 and TSF) in the morning session of NPC. A number of senior economic officials, including Premier Li, will also hold press conferences during the meetings to provide further details/clarifications on policies in major economic fronts.

In previewing what to expect from the "two sessions", this week Xinhua reported that China will "not flood the economy with government investment as it pursues more stable, healthy economic growth," an official with the top economic planner said Wednesday. "Instead, it will focus on supply-side reform for a modest expansion of aggregate demand," said Li Pumin, secretary general of the National Development and Reform Commission, at a news conference.

Li made the remarks when answering a question on whether China would roll out a major stimulus plan like in 2008.

"Stimulus plans are used to prop up weak demand with government investment under special circumstances," he said, adding it was different from the scale of fixed-asset investment (FAI). It was recently reported that 23 provincial-level regions had announced FAI volume totaling some 45 trillion yuan (about 6.54 trillion U.S. dollars) for 2017, stoking concern of a gigantic stimulus plan.

Li dismissed the worries by saying FAI volume is the aggregate rather than newly-added investment and includes investment from the public and private sector. The FAI volume of 32 provincial-level regions rose 7.9 percent year on year to 60.65 trillion yuan in 2016 and is likely to hit 65 trillion yuan, Li said.

After China's economy entered a "new normal" stage, the major difficulties were a by-product of supply rather than demand, he said. The addition of excessive production capacity and redundant projects will be forestalled, and more efforts will be made to meet demand with effective supply, he added.

The overarching theme over the past few years has been China's attempt to transition its export- and investment-driven growth model into one that draws strength from consumption, innovation and the service sector. Consumption contributed 64.6 percent to China's GDP growth in 2016, up 4.9 percentage points from 2015, official data showed.

In the process, however, China has also been quietly fading out some of its legacy industries, such as coal, where as reported on Wednesday, Beijing warned it would have to "reallocate" some 500,000 mostly coal and steel workers (to start) into growth industries, such as ridesharing and taxicabs.

"This year we will continue to cut capacity in coal and steel," Yin Weimin, the head of China's Ministry of Human Resources and Social Security, told reporters. "We will need to reallocate jobs to 500,000 workers," he said, including assigning workers different jobs within the same or a different company, early retirement or encouraging them to become entrepreneurs.

 

Weimin added that China will introduce a policy this year to encourage the development of new industries, for example internet-related industries, that will create new jobs, he said. In 2016, he said that China reallocated jobs to 726,000 coal and steel workers "without any major problems", adding that China's overall employment outlook in 2017 is expected to remain relatively stable, despite the government facing immense pressure to create jobs.

Meanwhile, China has decided to adopt a "prudent and neutral" monetary policy this year to keep liquidity at an appropriate level and avoid large injections. Official data released Wednesday showed that China's manufacturing purchasing managers' index expanded for the seventh month in a row to hit 51.6 percent in February, further evidence that the world's second largest economy is stabilizing amid the uncertain global outlook.

In this context, the following Goldlman analysis puts in context the past two years of Chinese economic growth and momentum  and what has driven them. The chart below plots the decomposition of moves in China's 5-year swap rates into the two market-implied macro drivers. The results provide an intuitive qualitative assessment of market moves since mid-2015.

August 2015 to January 2016 – deteriorating growth expectations: From mid-2015 through the beginning of 2016, as policymakers began another round of RMB reform, growth expectations deteriorated sharply. Falling growth expectations weighed on interest rates, although the downward pressures were partially offset by an incremental hawkish shift in the markets' expectation for monetary policy, perhaps given the backdrop of the substantial capital outflows that followed the RMB depreciation episodes in August 2015 and early January 2016.

February to Oct 2016 – improving growth expectations, easier policy: From late January 2016, a broad improvement in growth expectations on the back of a meaningful quasi-fiscal credit impulse pushed towards higher swap rates. However, from the perspective of the interest rate markets, the improving growth expectations were more or less offset by expectations for easier policy, leaving swap rates broadly unchanged.

Since Oct 2016 – tighter policy expectations, continuing improvement in growth expectations: Since October 2016 swap rates have moved higher by over 100bp. Our decomposition suggests that over two-thirds of the increase in swap rates through mid-December 2016 was related to a more hawkish shift in markets’ perception of monetary policy. The more hawkish shift in policy expectations also weighed on equities through the end of the year, although this has reversed recently as market growth expectations have continued to improve steadily.

Hawkish shift in PBoC policy perceptions key driver of higher swap rates since October
Contribution of growth and policy shocks to move in China 5-year swap rates

Perhaps more than anything, the above implies that, as Deutsche and UBS both warned recently, the period of Chinese upside momentum and credit-impulse contribution to global growth is about to end. For those who missed it, here is what UBS said:

"Our global credit impulse (covering 77% of global GDP) has suddenly collapsed" and explains that "as the chart below shows the 'global' credit impulse over the last 18 months is essentially mainly China (the green shaded bit), which even now is still creating new credit at an annualized rate of around 30pp of (Chinese) GDP. But the credit impulse is the 'change in the change' in credit and even the Chinese banks could not sustain the recent extraordinary pace of credit acceleration. As a result: whereas back in Jan '16 the global credit impulse was positive to the tune of 3.8% of global GDP (of which China comprised 3.5% of global GDP) it has now fallen back to -0.1% of global GDP (China's contribution is -0.3% of global GDP).

 

So while it may seem rather distant and boring compared to the daily scandals emerging daily from the realm of US politics, the fate of global economic growth in the near-term will be determined in Beijing over the next 2 weeks. Our advice is to drown out the noise as much as possible, and follow developments in China closely.