Across The Border

Stronger Chinese economic data in August, but what’s next?

Analysts are divided on whether more government stimulus is on the way. But they agree on the need for ongoing structural reform

PUBLISHED : Monday, 19 September, 2016, 12:40pm
UPDATED : Monday, 19 September, 2016, 10:40pm

China posted solid economic data in August, ostensibly the result of stimulus measures, particularly monetary stimulus taken in 2015 and earlier this year.

For the remainer of the year, however, economists are divided on whether more stimulus is both necessary or on the way, but arguably more important, whether vital structural reforms will continue at the pace needed.

Last week, China announced figures on August’s fixed asset investment, industrial output and retail sales, all of which beat the expectations of analysts polled by Bloomberg, growing by 8.2 per cent, 6.3 per cent and 10.6 per cent, respectively, on a yearly bases.

In addition, Bank of America Merrill Lynch China economist Zhi Xiaojia noted that August’s money and credit data came in stronger than predicted.

“As key data improved, we think the chance of major easing, such as interest rate and RRR cuts [banks’ reserve requirement ratio], is low for the rest of 2016,” Zhi wrote in a research report.

There are also doubts about whether there is much potential left for monetary easing to have an effect.

“The problem is not the cost of funding, it is access to funding, especially for SMEs,” says DBS economist Nathan Chow.

“Since 2015 there have already been five interest rate cuts, but private companies are no more able to get financing than they were before the cuts.

“If the US were to raise interest rates at a time when China is easing them, that would increase the pressure on the value of the renminbi.”

Nonetheless, Chow expects to see some fiscal stimulus later this year, particularly infrastructure spending, but also tax reforms.

HSBC’s co-head of Asian economic research, Frederic Neumann, is less positive about the fortunes of China’s economy.

“Export figures aren’t great and private investment continues to be weak. This leaves the economy with the narrow growth drivers of government spending, and private consumption,” he says.

“To guarantee they don’t breach the floor of 6.5 per cent GDP growth this year, a lot of easing is required.”

Neumann also anticipates that easing will be carried out through fiscal rather than monetary policies due to growing concerns among policy makers about China’s levels of debt.

Those levels are again highlighted in a latest report from the Bank for International Settlements, in its latest quarterly review, which suggested China’s credit-to-GDP gap hit 30.1 in the first quarter of 2016. BIS considers a credit-to-GDP gap of 10 to be a sign of potential danger.

But despite the differing views on the necessity of further stimulus, analysts questioned largely agree that policy makers must continue to make further structural reforms.

“Easing alone is not the solution, reforms are also necessary,” says Neumann.

The epitome of the need for reform in the eyes of many analysts is China’s bloated state-owned sector, which, DBS’ Chow describes as the “core reform which will affect whether reforms of the banking system will be successful, which in turn will impact whether private companies will be able to get money to grow”.

Other areas that economists have long argued need urgent reform include China’s household registration system (the hukou system), and the ongoing urbanisation process.

The authorities hope that rural labourers still moving in their droves into cities, preferably third and fourth tier cities, will boost consumption and growth, while allowing more productive large-scale farming to take place in the countryside.

Chow is reasonably positive these reforms will remain a priority.

“I would say they have been doing everything they can. They just need to speed things up a bit,” he says.

HSBC’s Neumann is less positive on progress, but agrees the programme has to be accelerated.

“We are rather disappointed with the pace of structural reforms,” he says. “It is not the case that nothing is happening, but they need to happen more quickly, and the elephant in the room is the SOEs.”

The potential for structural economic reforms is, in part, linked to the scale of the stimulus.

“If you take your foot off the easing, then it becomes even harder to make structural reforms,” says Neumann.

“Keeping the foot on the gas gives China a bit of leeway.”