China’s policy stimulus.

global perspectives

China’s policy stimulus.

28 November 2018

Salman Ahmed, PhD

Chief Investment Strategist

Charles St-Arnaud

Senior Investment Strategist

We think the consensus forecast for Chinese growth in 2019 is too bearish. It has been pricing a lot of negativity which we think will be offset to a certain extent by the policy moves undertaken by China.

When it comes to the Chinese domestic economy, we have seen a significant increase in targeted stimulus efforts by the government in recent weeks. For instance, the Chinese authorities have ramped up use of currency reserves in order to stabilise the currency. Recent data shows CNY 120 billion was used, which is the highest level since January 2017. In addition, we have seen significant rhetoric delivered by key individuals and specific policy actions aimed at stabilising the equity market. There has been a wave of nationalization when it comes to the weakest companies, which have been using shares as collateral, and direct government support for the equity market via proxy purchases.

Fiscal policy is another tool being used by China and, based on our estimates, the easing is now comparable to what we saw in the immediate aftermath of the global financial crisis. We expect the fiscal deficit to increase by 0.4 to 0.5ppt in 2018. Specifically, the tax reduction of CNY 1.3 trillion recently discussed by the Ministry of Finance may add 0.29ppt to next year’s growth, according to various policy sources.

Focusing on the credit channel, recent data has been quite worrying as it shows a continued slowdown in credit deployment in China. Indeed, we think this will lead to a faster shift in credit policy in coming months, signs of which are already appearing. This indicates a rapid change in the government’s stance (for example, explicit window guidance communicated by PBoC governor Yi Gang to key policy banks recently).

In terms of flow of current macro data, the Chinese economic surprise index is now showing signs of a more sustained upward trend having improved from -53 earlier this year to +2.7 currently. This implies data is starting to surprise on the upside. The latest export/import numbers were consistent with this trend, though some weakness is expected early next year as the tariffs come into play.

All in all, we are more optimistic than the consensus and think next year’s growth in China is likely to surprise on the upside. This means that the 6.2% consensus growth forecast for 2019 may need upward revision as the impact of various policy moves start to show up in data in coming months.

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