Last week we documented several instances of China's most recent monetary easing, from the expanded usage of the Medium-Term Lending Facility to purchase China's equivalent ot junk bonds, to the barely noticed 103bps cut in China's 3-Month Treasury rate, even as the PBOC had cut the RRR three times already, most recently at the end of June.
However, judging by the ongoing slide in the Chinese stock market, it was not enough; meanwhile in a curious development, last week we also reported that in a very rare public "war of words" between the PBOC and the Ministry of Finance, the PBOC accused the MOF of not doing enough to stimulate the country and that the country's fiscal policy wasn't "proactive." That, as we said at the time, was a clear signal that fiscal policy easing may be imminent.
And, as we learned overnight, it was because on Monday the State Council held a meeting in which it discussed economic policies, and decided to make the fiscal policy more "proactive" (a word we had heard just a few days earlier), and to keep liquidity conditions "reasonably adequate". To temper expectations, the government also reiterated that they intend to avoid aggressive loosening like the "4 trillion" stimulus China rolled out in 2008/09.
Commenting on the announcement, Deutsche Bank writes that "the statement is a confirmation of policy stance changing from tightening toward loosening."
Indeed, as noted here over the past month, the change of monetary stance has already happened in Q2 with the RRR cut and injection of liquidity through MLF. The new message from the meeting today is that fiscal policy will become incrementally more expansionary.
Specifically the government will:
- allow all firms to deduct 75% of their R&D expenses from tax, which they estimate can save firms RMB 65bn for the full year;
- speed up the disbursement of tax rebate for some industries by end of September; and
- accelerate the issuance and disbursement of RMB 1.35trn local government bonds, to help ongoing infrastructure projects.
Indeed, as the PBOC researcher publicly decried, fiscal policy has been less supportive so far this year compared to 2017, as infrastructure investment grew at 7.3% yoy in H1 compared to 19.0% in 2017.
With the message from the State Council on Monday, Deutsche Bank now expects growth of infrastructure investment to rebound in H2 to 10%.
One question is whether the central government will loosen control over local government financing vehicles and the property market as these issues were not mentioned in the State Council statement today.
We think the government may be reluctant to do so at this stage, as the economy is still stable and the trade war has not affected exports significantly. If growth slows below 6.5% in H2, we may see further loosening on those issues.
Meanwhile, the German bank maintains its forecast of GDP growth at 6.5% in Q3 and Q4 and 6.3% in 2019, and as a result of the change in poliy posture, it now sees the risks to its growth outlook in H2 shifted from downside to balanced.
The main upside risk comes from policy easing and potentially another round of property boom, particularly in tier 2 cities. The main downside risk remains to be the trade war. The other downside risk in H1, policy tightening and deleveraging, has become less alarming. We continue to expect RMB to depreciate to 6.8 and 7.2 against the US dollar in 2018 and 2019.
Finally, commenting on the move, Gluskin Sheff economist David Rosenberg said that "Beijing must really be worried about the macro backdrop to have engaged in this double-barreled fiscal and monetary policy easing. Best to fade the rally because fighting a deleveraging cycle ain't easy."
Beijing must really be worried about the macro backdrop to have engaged in this double-barreled fiscal and monetary policy easing. Best to fade the rally because fighting a deleveraging cycle ain't easy.— David Rosenberg (@EconguyRosie) July 24, 2018
For now, the market is doing precisely the opposite, with the S&P rapidly approaching its January all time high now that the threat of an imminent Chinese hard landing appears to have been removed once more.
Rosenberg's trade advice aside, the real question is how Trump will respond when he learns that China is now easing not only on the monetary side - pushing the Yuan to fresh one year lows - but also fiscally?