Earlier today we presented three reasons to doubt the veracity of China's unabashedly strong Q1 economic data: the collapse in land sales, weak imports, and the unexpected decline in electricity consumption. We can now add one more: according to Bloomberg, China is now preparing to take even more stimulus steps to boost growth.
According to the report, Chinese officials are drafting measures to bolster sales of objects which have seen a surprising decline in consumer demand, namely cars and electronics. Notably, the report coincided with the latest GDP data showing a stronger than expected 6.4% expansion in the first quarter. Yet that appears to be insufficient for Beijing - which remains stuck in a protracted trade war with the US - and Chinese leaders are "stepping up attempts to bolster consumption and mitigate the threats posed by trade tensions with the U.S."
As Bloomberg reports, "the proposals include subsidies for new-energy vehicles, smartphones and home appliances, and are at a consultation stage with other government branches, with no guarantee that they’ll be approved."
Among the other components of the proposal, via Bloomberg:
- An increase in the number of automobile licenses
- A waiver on car-ownership quotas for families who don’t own vehicles
- Subsidies for people who exchange vehicles that are as many as 10 years old for electric, hybrid or fuel-cell vehicles
- No limits or traffic controls for new-energy vehicles
- Encouraging banks to increase auto loans in tier-3 cities or below
- Considering deducting auto purchases from personal income tax
- Subsidies of up to 13 percent for a home appliance purchase at a maximum of 800 yuan ($120) per purchase
- Exemption of value-added taxes for used-car transactions until the end of 2020
The target of the latest stimulus is clear: to boost flagging auto sales. As we reported last week, dropped 12% to 1.78 million units, according to the China Passenger Car Association. This is after an 18.5% drop in February and a 4% drop in January, and follow the worst year for Chinese auto sales in decades.
As Bloomberg adds, it’s notoriously difficult to own a car in major Chinese cities because of quotas to tackle traffic congestion and air pollution. In Beijing, the annual new vehicle quota dropped to 100,000 in 2018, and each licensed gasoline-fueled car has to be idle one day a week. "That’s prompted the government to provide incentives for motorists to drive new-energy vehicles -- including pure-battery electrics, plug-in hybrids and fuel-cell cars."
The proposed stimulus would be the latest in a long series of attempts by the government to stimulate flagging growth: most recently China unveiled its most ambitious tax reduction in years, slashing the VAT, while a record credit injection has clearly had a favorable impact on industrial production, if not China's all important real estate.
Needless to say, for a world desperate in need of its old, familiar, credit-fueled growth dynamo, China’s stabilization and the prospect of even more stimulus will come a relief. It’s also a sharp reversal from as recently as January when key readings were pointing to a pronounced downturn, a factor U.S. officials have touted as leverage in their push for a trade agreement. It is also a question as to whether the Fed will now be forced to once again reverse its tightening "pause" and resume rate hikes into the second half of 2019.
“President Trump and other U.S. officials spent much of the last year saying that China’s slowdown was making Beijing desperate for a deal,” said Michael Hirson, Practice Head, China and Northeast Asia at Eurasia Group and a former U.S. Treasury Department official. “Now that China’s growth is recovering, Trump and team will be getting more questions from pundits and the media about whether his leverage is slipping away.”
Justifying China's ongoing desire to overstimulate the economy, Bloomberg economist Chang Shu and Qian Wan wrote that "we expect the economy to continue to stabilize in the second quarter, but believe continued policy support is warranted. Government-led infrastructure spending has kick started the recovery. What’s needed still -- a turnaround in the private sector to drive self-sustaining growth."
On the other hand, with China now on full tilt when it comes to stimulating the economy, the market will be especially attuned to the likelihood of China overheating in the near future, and as Bloomberg macro commentator Richard Breslow writes this morning, "we’ll get a good sense of whether rates can carry on from here by how they react to the latest, and not officially confirmed, report that the Chinese government is preparing new stimulus measures. It really matters in trying to understand the trading mindset."
As for the overarching question of what this incremental stimulus means just as Beijing has, reportedly, stabilize the economy, Breslow also puts it bet: "Is additional stimulus a sign that things are about to get a lot better? Or a sign of renewed concern?"
Today's stock market reaction should provide the answer.