Despite having cut interest rates four times, and the reserve ratio requirement for banks three times, there has been little, if any, indication that conditions in China’s economy are improving.
Manufacturing PMI gauges for June, released yesterday, while not terrible, were hardly impressive either. They’re likely to be reflective of other Chinese data in the days ahead, including Q2 GDP.
The chart below, supplied by CBA, shows how the nation’s PMI gauges have been declining, and in the case of manufacturing, flatlining, over the past six months.
It has got some asking whether policymakers in Beijing have lost effective control over the economy. While those who watch the daily gyrations in China’s stock market will likely agree, according to CBA’s China and Asia economist Wei Li, it’s unlikely to be the case.
“It is true that there has been little material improvement in growth so far, but it reflects Beijing’s priority, rather than ability. Up until recently, economic growth targets were downgraded on local governments’ work agenda. Instead, Beijing was prioritising the quality of the economy, such as lifting social welfare coverage, reducing energy consumption and accelerating industrial upgrading. We believe this is no longer the case. As economic growth has slowed to the lower limit of Beijing’s comfort zone, policymakers have become more vocal talking about the need to revive growth. Premier Li Keqiang is confident that China has the ability to achieve around 7% GDP growth in 2015. Reportedly, China has also put up several ‘contingency plans’ to stabilise growth if needed”.
What Li is saying is that having tried to focus on the quality rather than quantity of investments, Beijing’s patience is running thin. Growth remains subdued and there’s a growing case that additional measures will need to be implemented in order to achieve the 7% growth target specified for the current calendar year.
With looser monetary policy failing to do the trick, that likely entails returning to past drivers – infrastructure and property development – to fire flagging growth.
Is that a desirable outcome? Probably not, particularly given Beijing’s desire to encourage greater levels of household consumption, but it would likely provide a short-term sugar hit to economic activity.
Whether this eventuates will likely be determined by the strength of upcoming economic data. Clearly further weakness, particularly in GDP, will see the likelihood of additional policy stimulus grow.
However, as we have all seen from China’s stock market over the past year, trying to achieve economic results quickly rather than methodically can often lead to unintended, and more importantly detrimental, consequences.