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Tax cuts announced in the past few months will put more money in the hands of Chinese households and businesses. Photo: AFP
Opinion
Macroscope
by Hannah Anderson
Macroscope
by Hannah Anderson

In China, government policies, rather than GDP numbers, tell us most about markets

  • Hannah Anderson says in trying to balance the need to support the economy with the need to control systemic risks, Beijing is using a mix of monetary and fiscal measures that investors should watch closely to gauge the health of the economy

“Crosscurrents” seems to be the buzzword for global markets in 2019. And one of the oft-mentioned risks for 2019 is the ongoing slowdown in China.

Crosscurrents is also an apt descriptor for what is happening within the Chinese economy. On the one hand, the government aims to support the economy. On the other hand, the importance of controlling systemic risks limits the use of old tools.

A variety of economic indicators has provided conflicting signals, fiscal and monetary policies may appear to be moving contrary to investor expectations, and there are many unanswered questions about external factors affecting China’s economy and markets – most notably the ongoing trade war with the United States. These crosscurrents make it difficult to predict how Chinese assets will perform this year.
Recent data showed that China’s real GDP growth slowed to 6.4 per cent in the fourth quarter of 2018. Underneath the surface, different segments of the economy have been moving in different directions. Industrial production data showed a slight uptick after the government eased controls on polluting sectors and upstream producers last year, while consumer spending on durables, namely autos, continued to weaken. Infrastructure spending, a traditionally reliable channel through which to boost growth, also looked to have made a comeback towards the end of the year.
The first large-scale power grid in Xiongan, Heibei province, is under construction. China’s state planner has in the last two months approved several big infrastructure projects, in an apparent effort to boost its flagging economy. Photo: Xinhua 

Policies enacted throughout 2018 are likely to provide diminishing support for the economy – to be clear, growth looks unlikely to crater, but it may slow further – meaning authorities are likely to either introduce new measures or more aggressively pursue existing policies.

China’s government seems comfortable with modestly lower growth. Official commentary has suggested real GDP growth may hit 6.3 per cent for 2019, with the potential for even lower growth in the first quarter. It is worth keeping in mind that even if growth were to fall to 6 per cent, for example, the additional output generated would equal 5.1 trillion yuan (US$753 billion). A decade ago, China’s gross domestic product would have had to expand by 14.1 per cent, almost double the rate China was growing at the time, to add that much output.

Economic policy operates on two different tracks in China: monetary and fiscal. Much attention has been paid to monetary policy lately.

The already high levels of debt in the corporate sector, the People’s Bank of China’s long-term focus on financial stability, and its ongoing efforts to reform China’s financial plumbing, by relying on rate tools over quantity-targeting measures and by standardising the private sector’s access to credit – all limit how far China can walk down the monetary track. And aggressive easing may even be counterintuitive.

China’s real GDP growth slowed to 6.4 per cent in the fourth quarter of 2018. Underneath the surface, different segments of the economy have been moving in different directions. Photo: AP
Consequently, in 2019, the PBOC will focus less on providing broad stimulus for the economy, and more on improving financing conditions for firms, particularly small and medium-sized private enterprises. Recent moves like the introduction of the central bank bills swap and changing regulations to allow greater diversification in commercial banks’ capital structure all support the idea that the central bank is more concerned with the effective transmission of policy, rather than pursuing outright easing as it did during prior growth slumps.
The fiscal track merits more attention this time around. Measures announced in the waning months of 2018 – a higher threshold for income taxes and tax cuts for small businesses – amount to roughly an additional 0.8 per cent of GDP left on the balance sheets of households and businesses. Simplification of the value-added tax system and a further cut to the VAT rate, both distinct possibilities in the first half of 2019, could add another 0.8 per cent of GDP to corporate balance sheets. Additional measures to support consumption of large-ticket items, like cars, are also likely.

Yet, macroeconomics determine the fate of markets in China to a lesser degree than other markets. US nominal GDP growth and price changes in the S&P 500 are 2.3 times more correlated than Chinese growth and the CSI 300, though neither exhibit a particularly close relationship.

Growth certainly has an impact on sentiment, and investors watch government policy closely, but the overall rate of growth will tell us little about onshore equity performance versus what we can learn from the way that growth is achieved. As a consequence, while China’s rate of growth will remain on the list of concerns, the crosscurrents of China’s different policy measures will be top of the list of factors to watch within China.

Hannah Anderson is a global market strategist at JPMorgan Asset Management

This article appeared in the South China Morning Post print edition as: Navigating the ever-changing currents of mainland policy
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