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With the threat of a ‘Grexit’ and a resulting financial crisis, and the slowdown in China, some have been calling for a Chinese stimulus package of 1-2 trillion renminbi.Ting Lu, China economist for Bank of America-Merrill Lynch says while it is too early to quantify China’s stimulus, the current slowdown isn’t like the 2008 recession.
That slowdown merited a 4 trillion renminbi stimulus.
In the absence of a Greek exit from the eurozone, Lu argues, China’s stimulus will likely be just between 400-500 billion renminbi.
He identifies three key reasons that we might not see a massive stimulus out of China:
- The current situation for China isn’t as bad as it was in late 2008 following the Lehman bankruptcy. At the time China lost 25 million jobs in one quarter, China’s labour market today is “relatively tight” and wages are still increasing.
- The Chinese government sees the falling potential growth but has no appetite to boost GDP growth beyond 8 per cent according to Ting and his team.
- The Chinese government has so far failed to deliver what it had planned for 2012 thus far, and for now they are likely to work on those commitments rather than announcing a new massive round of stimulus.
In the event of Greek exit from the eurozone, which could throw the global financial system into torpor and see millions of Chinese workers out of jobs, Ting expects the stimulus to be larger.
But a pertinent question is, does China have the tools for another stimulus given declining forex inflows, declining deposits etc.? Ting says:
“We believe these concerns are irrelevant. China’s loan-to-deposit ratio is only 67%, with 20% of deposits locked by the PBoC as required reserves. It’s true that FX inflow created most of the base money in the past, but China can easily create base money in other ways if FX inflow depletes.
China’s massive US$3.6tn reserves (SAFE+CIC) means that China has a lot of room to inject its own RMB- denominated liquidity without triggering a currency crisis. It’s true that fiscal revenue growth is slowing to single digit along with the economic slowdown, but China’s government debt is just about 45% of GDP (central government debt 25% of GDP) and the central government still has RMB2.3tn deposits with the PBoC. This means that there is enough room for fiscal stimulus to fill the current slack which is not big anyway.
The real constraints of Beijing’s capability in stimulating the economy are CPI inflation and home prices. Fortunately, CPI inflation softened to 3.4%yoy in April from 3.6% in March (below the 4% target) and home prices are falling, suggesting there is room for pro-growth policies.”
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