Don’t expect too much about China’s micro-stimulus policies
Due to the stabilized economy in the second quarter, Chinese economy saves the risk of losing growth. Actually, observers never wonder about the policymakers’ determination to stabilize the economy; they rather worry about the price and result of the stabilizing measurements.
And this is the very unique advantage of the Chinese system. Since the second quarter of this year, the central government has been overweighing micro-stimulation policy; local governments have also pushed forward various stimulus policies scaling over 10 trillion yuan. Credit in June may surpass 1.1 trillion yuan. Under an array of measurements, Chinese economy shows a stabilizing trace. PMI indicator keeps rising in 4 consecutive months and has recovered to 51 by now. However, our views deviate from the consensus expectation on three major aspects. First, according to our model expectation, money supply growth will continue decreasing, while mainstream opinion expects recovery; second, we think that fixed investment growth will appear dramatic downfall in the fourth quarter, yet mainstream opinion consider it of steady operation; third, we believe that CPI and PPI would continue slump while mainstream opinion still expects steadiness. Assume that our views correct, then Chinese economy will return to the downward trend at the latest in the fourth quarter. What conditions may disconfirm our expectancy?
No doubt that central and local governments will keep on offering micro-stimulating policies. Such policies will definitely back the economic trend. However, the existing problems in Chinese economy structure have not been eliminated by way of such policies.
The core issue of Chinese economy lies in the over-high excessive capacity and the reliability on a continuous financial support. Financing represents social resource mobilization ability. Mass financing resource continuously inflow into industries with excessive capacity and an array of projects with low return ratio, meaning deterioration of dynamic resource allocation and wasting of substantial resources. A necessary consequence of resource waste is low return on investment, which leaves increasing project without the debt-servicing capacity relying on credit support with a suspicion of Ponzi financing. Seeing from statistics, excess capacity rate in China is over 32%, far beyond the alarm level of 25%; non-governmental debt weighs more than 186% of GDP, ranking the first among global major economic entity; return on assets of listed companies fall to an all-time low. The current various stimulus policies have not improve the situation in essence. Instead the situation is being made worse. Therefore, game between the short-term effect of stimulus policies and the long-term stall in economic structure always exists in Chinese economy.
Furthermore, one macro-effect of the deteriorating resource allocation is the great decrease in productivity growth. It helps nether Chinese export expansion nor the growth of the consumption demand based on income and the investment demand based on return on investment. Global trade growth has appeared a platform-type downward trend. Unless productivity growth rate increases, otherwise it will be difficult to expect expansion in Chinese export share. And it is exactly the case. Though RMB has entered another round of depreciation, Chinese export still has difficulty in gaining growth. Seeing through the year, the rate may keep around the low level of 5%.
One highly possible situation is that loosen policy will have supporting effect in a period. But the effect can not last long. For instance, the highly-expected renovation projects of housing in run-down areas lack economic rationality. The return on investment can hardly cover the cost. Meanwhile the projects will crowd out real estate market. Therefore its pulling effect cannot be expected to last. For another example, the railway department plans to add its investment. Yet restricted by demolition, the progress is quite slow. And with the current transporting capacity, the year-on-year increase rate of railway freight transport volume keeps below zero this year. It’s hard to say that railway investment is having good economic and social efficiency. Generally speaking, the current credit stimulates more resource flowing to low-efficiency projects. While the pirate enterprises and small and medium-sized enterprises that will drive Chinese economic growth decrease in the shares. With the two, the short-term effect of stimulus policies may fail to offset the negative effect brought about. After a period, as Chinese real estate market cools and bad debt ratios of banks increase, monetary expansion rate would fall.
Stabilizing economy in the second and third quarters will slightly recover the inventory. Yet with the great pressure from excess capacity and heavy inventory, the inventory recovery is hard to develop to global prosperity. In a word, we are facing the combination of slowly discouraging economy and micro-stimulus policy. Which of the two would prevail? Our answer is the former. Economy of the fourth quarter may return to the downward track.
Published on China Securities Journal | 2014-7-7
