Super-Size Me: China’s 'Mini' Stimulus Starts Expanding
China’s so-called mini-stimulus is beginning to morph into something larger.
Nomura Holdings Inc. economists said measures including central bank loans for low-income housing are “starting to amount to something quite significant” as they scrapped their forecast for a second-quarter cut in banks’ reserve requirements. UBS AG said the government has gradually strengthened its mini-stimulus over the past couple of months and the central bank “has quietly eased liquidity conditions.”
The ruling Communist Party is trying to revive the economy without repeating the mistakes of its $586 billion stimulus begun in 2008, which caused a record buildup of debt and inflated property bubbles around the country. The State Council, or cabinet, said today it would lower reserve requirements for some qualified banks, after Premier Li Keqiang last week called on regional authorities to help stabilize expansion.
“It’s definitely getting bigger,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “That’s quite natural, as Premier Li Keqiang has urged local governments to show real action.”
Increases in housing and railway investment alone should boost gross domestic product growth by 0.8 percentage point, Nomura said in a May 26 report. Dariusz Kowalczyk, senior economist at Credit Agricole SA in Hong Kong, estimated that the government’s quantifiable stimulus steps will add 1 percentage point to expansion, while UBS Chief China Economist Wang Tao said measures amount to 0.6 percent of GDP.
A property-market slump threatens to limit any economic rebound and pressure policy makers to do more. Chinese home prices fell 0.3 percent in May from April in the first monthly drop since June 2012, SouFun Holdings Ltd., the nation’s biggest real estate website owner, said today.
Measures have multiplied since the State Council on April 2 outlined steps including faster railway spending and tax breaks to help ensure the government meets its goal of about 7.5 percent growth.
The State Council said today that it would “properly” lower the reserve ratio for some banks who grant a certain amount of loans to rural borrowers and smaller companies, without elaborating. China will reduce social financing costs and increase support to service industries amid “relatively large” downward economic pressure, according to a statement on the government’s website.
The Finance Ministry on May 28 called for faster spending of budgeted funds, a move Bank of America Corp. analysts said will be positive for expansion. Guangdong province, the largest regional economy, will allocate 64.7 billion yuan ($10.4 billion) to support growth, according to a May 27 report on the local government’s website.
The National Development and Reform Commission, China’s main economic-planning agency, is studying a fund of at least 100 billion yuan for transportation that will solicit some private investment, the state-run Economic Information Daily reported yesterday, citing an unidentified person.
“We see a timely allocation of fiscal expenditure as critical to the growth recovery the government is trying to generate,” Goldman Sachs Group Inc. economists including Song Yu in Beijing said in a note yesterday.
The stimulus may be starting to appear in indicators after April data showed a deepening slowdown with decelerations in industrial-output and investment growth.
China’s official manufacturing purchasing managers’ index probably rose in May to a five-month high, signaling a faster pace of expansion, based on analysts’ median estimate in a Bloomberg News survey ahead of a June 1 report. A similar gauge from HSBC Holdings Plc and Markit Economics also advanced to a five-month high in a preliminary reading released May 22.
The world’s second-largest economy is projected to grow 7.3 percent this year, which would be the weakest pace since 1990, according to an analysts’ survey this month. Expansion slowed to 7.4 percent in the first quarter from a year earlier, from 7.7 percent in the previous period.
“As the economy weakens, the government’s support will strengthen gradually because after all, they need to protect the lower bound of growth,” UBS’s Wang said.
Chinese President Xi Jinping said this month that the nation needs to adapt to a “new normal” in the pace of economic growth.
Even so, Standard Chartered Plc said in a May 28 report that the interbank market shows the central bank is easing monetary policy. The seven-day repurchase rate, a gauge of funding availability, has dropped 0.93 percentage point this month to 3.25 percent, according to a daily fixing.
The yuan has weakened 3.1 percent against the dollar this year, the most among 11 Asian currencies tracked by Bloomberg, while the benchmark Shanghai Composite Index is down 3.6 percent.
Ding Shuang, senior China economist at Citigroup Inc., said recent actions don’t even add up to a mini-stimulus because budget spending is being accelerated rather than boosted. Li’s recent remarks haven’t signaled a policy shift, said Ding, who formerly worked at the People’s Bank of China.
The central bank, which this month asked lenders to approve mortgages faster, may continue “targeted easing,” including reserve-ratio cuts for some banks and bond purchases, according to a May 28 commentary in the state-run China Securities Journal.
The PBOC disbursed 100 billion yuan through a re-lending facility to China Development Bank in April for shantytown renovations, and may expand re-lending injections to 400 billion through June, Nomura said in its report. The PBOC didn’t respond to a faxed request for comment from Bloomberg News after the 21st Century Business Herald reported on the loan last week.
Bigger moves may be in the offing. Nomura and Standard Chartered have forecast a nationwide reserve-ratio cut next quarter. Barclays Plc said in a note yesterday that chances are rising of more significant easing in coming weeks, such as “targeted” interest-rate or reserve-ratio reductions.
“There is increasing evidence that Premier Li Keqiang is probably more serious about the 7.5 percent growth target than hoped by those who have wanted the government to tolerate lower growth,” wrote Chang Jian, chief China economist at Barclays in Hong Kong.
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