RaboResearch - Economic Research

China: Stimulus as good old recipe for stabilization

Economic Comment

  • China’s official quarterly GDP figure came in at 6.4% year-on-year in the first quarter of 2019
  • Beijing’s intervention in terms of stimulus was clearly visible in fiscal and credit data
  • To put it mildly, there seems to be some contradiction on previous deleveraging pledges and targets, and credit developments in reality
  • Although a US-China trade deal seems increasingly likely in the short term, broader tensions between the two countries are expected to persist over a longer period of time

The visible hand of Beijing

Figure 1: Lower contribution from domestic demand in 2019Q1
Figure 1: Lower contribution from domestic demand in 2019Q1Source: NBS, Macrobond

By posting an official GDP figure of 6.4% y/y in the first quarter of 2019, China’s economic growth figure did not disappoint at first glance. After some initial weakness in January and February, the March print was a first indication of stabilizing growth in 2019. The underlying GDP breakdown showed that the growth contribution from domestic demand (consumption and investments) was much less profound than in previous quarters (Figure 1), while the contribution from net exports was the largest since 2009. This large contribution of net exports was driven partly by stronger than expected exports, with especially March exports surging by 21.3% in nominal y/y terms. But also by weak imports, decreasing both in February and March (Figure 2). This signals underlying weakness in domestic demand going forward, despite the better than expected performance of several domestic indicators, such as retail sales, industrial production and fixed asset investments (Figure 3).

Figure 2: Weak imports in first months of 2019
Figure 2: Weak imports in first months of 2019Source: General Administration of Customs, Macrobond Note: all data for figures 2 and 3 are in nominal terms and up and until March 2019. There is no price deflator available yet for March 2019 data to calculate figures in real and volume terms.
Figure 3: Rebound in public investments
Figure 3: Rebound in public investmentsSource: NBS, Macrobond

Based on these official figures, it seems that the previously introduced fiscal and monetary stimulus measures have put a floor under the economic slowdown that started in the second half of 2018. On the fiscal side, investments in fixed assets from the public sector have been rising sharply, especially since the second half of 2018 (Figure 3). Regarding these investments, infrastructure and property investments were the main drivers in 2019Q1.

Figure 4: Credit takes the lead in Q1
Figure 4: Credit takes the lead in Q1Source: PBoC, Macrobond

While investments in infrastructure had their best performance since July 2018, property investments were especially noteworthy, given the 11.8% y/y surge, the fastest pace in more than five years. Aside from fiscal stimulus, there was also a significant credit boost from the monetary side in the first quarter of 2019. Total Social Financing (TSF) in 2019Q1 rose by 40% y/y (Figure 4), which is equal to CNY 8,198bn (USD 1,220bn). As a result, the total TSF stock surged by 10.6% y/y to CNY 204,410bn (USD 31,017bn), equal to 232% of China’s nominal GDP. To put it mildly, there seems to be some contradiction on deleveraging pledges and targets, and current developments in credit growth.

Too early to cheer about a (broad) recovery

Based on the developments in terms of fiscal and credit stimulus, Beijing’s intervention was clearly visible in 2019Q1. However, there are sufficient signals that it is way too early to celebrate an avoided economic slowdown, as the recovery does not hold for all parts of the economy. For example, the private sector contribution was lagging behind. This remains a key challenge for policymakers going forward, and this was recognized after recent Politburo summit meetings. After these meetings, policymakers renewed pledges to focus more on quality-driven growth and safeguarding financial stability, as originally stated in political goals dating back from end-2017 and 2018. Regarding the latter, credit data for the months ahead are to act as a clear sign whether these objectives are followed up in the short run, even at the expense of economic growth. The significant credit boost in 2019Q1 is simply not sustainable going forward.

Since the start of 2019, Chinese stock markets were among the best performers in the world. But after the more dovish wait-and-see Politburo stimulus announcements, the rally turned in opposite direction (Figure 5). Policymakers are now also aware that the amount of stimulus is not sustainable. That is why they have emphasized several times that the overall stimulus measures will be less large-scale and more focused. In that regard, it seems that Chinese stock markets react negatively to positive news. Good news is bad news? The same might hold for sentiment indicators such as PMI manufacturing indices for April. Both the official- and the Caixin manufacturing PMI index fell in April compared to March (Figure 6). The April PMI for the services sector, which still stands well above the neutral-50 level, is expected to be published on May 6.

Figure 5: Financial markets love(d) the stimulus
Figure 5: Financial markets love(d) the stimulusSource: Macrobond
Figure 6: Manufacturing PMIs lower in April
Figure 6: Manufacturing PMIs lower in AprilSource: Macrobond

Any (trade) deal on the horizon?

More stimulus could still be on the cards in case the domestic economic momentum and/or bilateral negotiations between China and the US would turn sour, resulting in tensions to flare up again. Although a trade deal seems more likely in the short term compared to a couple of months ago, broader tensions between the two countries are expected to persist over a longer period of time. As a result, any deal between both sides would not lead to a fundamental breakthrough. In the short run, we do not think that already installed tariff packages will be lifted completely and many of the already installed tariffs will remain in place as part an enforcement mechanism. In the medium term, we deem it not realistic that China follows up on more complicated demands, such as a significant opening up of certain strategic parts of the economy, forced transfer of technology and excessive support of state owned enterprises. As a result, we think that an overall deal will break down in the end, especially if a proper enforcement mechanism is not part of any deal. In that case, tensions are expected to rise sooner or later with disproportionate negative economic effects for the Chinese economy as a result.

Björn Giesbergen
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 62562

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