Across The Border

Strong stimuli less likely as China braces for ‘L-shaped’ growth

The People’s Daily, China’s Communist Party’s newspaper, gives economic outlook.

PUBLISHED : Tuesday, 10 May, 2016, 9:55am
UPDATED : Tuesday, 10 May, 2016, 9:55am

Investors should prepare for a low probability of strong economic stimuli in the near term and a short-lived rebound in investment growth as China braces for an L-shaped economic trend, analysts said.

In light of China’s severe structural problems, the economic growth trend should be ‘L-shaped’, rather than “U-shaped”, not to speak of “V-shaped”, and the government should not support growth by increasing debt, the People’s Daily, the ruling Communist Party’s flagship newspaper, quoted an “authoritative person” as saying in a front-page story on Monday.

“Overall, the (People’s Daily) report suggests to us that future policy easing may be more cautious and

that the government may try to hasten the pace of reforms, thus reinforcing our view that

the debt-fuelled rebound in investment growth will be short-lived,” said Yang Zhao, Chang Chun Hua and Wendy Chen, analysts for Nomura, in a note on Monday.

UBS analysts also said China has released new policy signals via the People’s Daily story, as it signalled “policy easing has peaked in the near term”.

The People’s Daily, published by the ruling Communist Party’s Central Committee, often indicates the intentions of top policy-making circles. Required to read by the Party’s members around the nation, the paper usually helps them understand what the leadership is thinking.

Interestingly, the newspaper often cites an “authoritative person” when discussing top-level policy issues, like in the case in January when seven questions on “supply-side reforms” were addressed, the Nomura analysts said.

“Supply-side reform” was a new slogan from President Xi Jinping in November when he emphasised the importance of addressing supply-side issues in the mainland economy.

Based on the words from the “authoritative” person, China may avoid using strong stimuli to raise investment growth in the short term, as it would create larger problems later, the Nomura analysts said.

“Trees can not grow in the sky. High debt inevitably brings about high risks. If not well controlled, it will lead to a systemic financial crisis, negative growth and even wipe out people’s savings,” the person said.

“We can’t, and there is no need, to push hard for economic growth by increasing debt.”

The person believed the growth rate “won’t drop too much even without stimulus,” given the economy has a lot of potential and is resilient.

According to the “authoritative person”, the most important thing for the government is to“push forward supply-side reforms”, “cut overcapacity”, and “reduce leverage,” the Nomura analysts said.

Last month, China said its first-quarter GDP growth slowed to 6.7 per cent from 6.8 per cent in the preceding three months, in line with expectations. March activity and credit-growth data both surprised to the upside, with notable growth acceleration in industrial production and fixed asset investment. However, after the data release, many analysts said the acceleration is fundamentally another fixed asset investment-focused demand rebound built on credit expansion.

“The debt-fuelled growth will be short-lived,” Nomura analysts said.

Coincidentally or not, the People’s Bank of China (PBOC) has just dropped a hint about their reluctance to continue an overly loose monetary policy.

The first-quarter monetary policy report, released by the PBOC over the weekend, contained no language of “loosened bias” and hinted at concerns over an upside risk to inflation, Goldman Sachs analysts said on Sunday.

On the PBOC’s policy stance, the report followed the language from the State Council’s Government Work Report in March and called it “appropriately flexible.” That is a shift from “appropriate loose and appropriately tight” policy mentioned in the fourth-quarter monetary policy report, they said.

Contrary to that, PBOC Governor Zhou Xiaochuan described the policy stance in February and March as prudent but “with a loosened bias”.

Macquarie Capital analysts agreed with the views and said the monetary policy has turned neutral after the “credit binge” in the first quarter after the central bank warned against the recent pickup in inflation and rising home prices.