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Chinese premier Wen Jiabao recently made some comments on driving growth through monetary policies and fiscal incentives, which pushed markets higher on speculation that this basically meant more stimulus.The top China economists from Bank of America and Societe Generale offered some insight on what he really meant.
Ting Lu, top China economist with Bank of America Merrill Lynch said while we are likely to see a series of pro-growth measures, markets shouldn’t expect another 4 trillion stimulus like the one announced in November 2008.
Wei Yao, analyst at Societe Generale said the fact that growth measures would be more pointed, was made clear by two editorials in Xinhua, China’s state press agency:
“At this junction, a “bigger” priority means the biggest priority, which is a clear signal of more policy easing to come. However, unlike in November 2008 when Beijing announced the four trillion stimulus package, the Xinhua News Agency followed up with two fairly balanced editorials on the same day to elaborate on Wen’s guidelines, as if it didn’t want the public to get the wrong idea.
The main messages from the editorials were very much in line with our expectations that there will be more easing, but a repeat of 2009/10 is not desired. Xinhua said explicitly that “stabilizing growth is not a simple-minded pursuit of the speed,” but rather “a means to facilitate continuous improvement of economic quality.”
Lu says he anticipates three more 50 basis point RRR cuts before the year-end and thinks Beijing could ease credit supply, start more projects, spend more on social welfare and quicken the construction of social housing and infrastructure. He also said banks will lend more and the central government will play a bigger role in spending.
Wei expects two more RRR cuts totaling 100 bps this year and says cuts to interest rates are unlikely.
4 Key areas to focus on
Yao pointed out that the Chinese premiere said additional support for investment projects would be contingent on ‘controlling financial risks’. But Yao said Jiabao had pointed out 4 key areas to work on:
- Boost household consumption with consumption subsidies and other policies.
- To stabilise investment demand with an emphasis on infrastructural projects like railways, environmental protection, infrastructure in the rural areas and the west.
- To lower the tax burden on companies.
- Suppressing speculative demand while supporting first-time home buyers which isn’t a major change to existing property policies.
Lu says Beijing knows that potential growth needs to be around 8 per cent and that policymakers have “no appetite to engineer a too-high growth”. He pointed out that they still think home prices are too high and are concerned about a rebound in home prices if they loosen all restrictions. Ting doesn’t expect home purchase restrictions to be scrapped until 2013.