Caixin
Apr 27, 2018 06:32 PM

Caixin View: Politburo Comments on Expanding Domestic Demand Don't Signal Stimulus

China's economic performance came under scrutiny at an April 23 meeting of the Politburo, a committee of the 25 most-senior officials in the ruling Communist Party chaired by party General Secretary Xi Jinping. Here's Caixin's take.

Much has been made of the meeting's comments about "continuing to expand domestic demand." This was the first time since 2014 that a statement issued after a Politburo meeting had used this phrase, triggering speculation that the government was concerned about a possible economic slowdown and may be getting ready to implement some easing policies. However, we don't think these comments by themselves point to easing — instead, they are a response to the diminishing contribution of net exports to China's economic growth, and persistent trade tensions with the U.S.

Controlling financial risks and deleveraging are still top priorities for the party and the government, as reflected in comments the Politburo statement that referred to “going all-out to fight the three tough battles,” namely prevention of major risks, alleviating poverty and controlling pollution. In addition, the statement called for the healthy development of the equity, bond and property markets. All of these will require the use of monetary policy to maintain pressure on financial markets and the flow of credit. The Politburo statement also said that monetary policy would remain “prudent and neutral.” As a result, expectations for a change in the direction of monetary policy toward an easing bias are not realistic.

Expectations for some loosening of monetary policy were raised last week in the wake of the surprise reduction in banks' reserve requirement ratio announced on April 18 and implemented on April 25. However, as we argued in last week's Caixin View, this was primarily an adjustment in the central bank's liquidity management, not a stimulus.

Nevertheless, as we also pointed out in last week's Caixin View, there are headwinds to growth coming from trade and from the slowdown in infrastructure investment growth evident in the first quarter. With no monetary easing in the offing, we think fiscal policy will play a greater role this year in supporting the economy and ensuring the annual GDP growth target of “around 6.5%” is met. First. we expect more spending on central government-funded infrastructure projects, such as the Xiongan New Area, a flagship project to build a new city on the swamps and farmland south of Beijing.

This will help cushion the likely contraction in local government-funded projects caused by greater scrutiny of their opaque borrowing practices and the sustainability of local government debt amid the crackdown on financial risks. Just this week, the city of Shaoyang in Hunan Province said it suspended and cancelled construction projects worth a total of 19 billion yuan ($3 billion) after the national auditor expressed concerns over its debt burden. The city government said all projects funded by borrowing launched after July 2017 will be suspended.

Even so, given that investment is the fastest way to give economic growth a boost, we do expect the Ministry of Finance to allow an expansion of local governments' legitimate financing options — for example, increasing issuance of special government bonds – to raise funds for infrastructure projects so that spending doesn't slow too much.

Weekly Roundup

Caixin Media and the Peterson Institute for International Economics jointly held the U.S.-China Economic Roundtable in Washington D.C. last week, with the theme “China and the World: Recalibration and Realignment.”

The panel included Yi Gang, People's Bank of China Governor, Sheila Bair, former chairwoman of the Federal Deposit Insurance Corp., Stanley Fischer, former Federal Reserve Vice Chairman, and Jonathan Pruzan, Morgan Stanley Chief Financial Officer.

Click here for Caixin's digest of the key things they said.

Macro & Finance

China Unveils New Asset Management Rules, Extends Grace Period For Compliance By 18 Months To End 2020.

China will more than double the limits on Chinese investments abroad under two pilot programs as part of efforts to further liberalize the country’s capital markets, the national foreign exchange regulator said Tuesday.

As regulators step up their campaign to rein in financial risks, they are taking another stab at crushing trust companies’ continued investment of pooled money raised via wealth management products in nonstandard assets. Authorities have put trust companies on notice that they will be given three years to exit investments that are seen as particularly dangerous.

More packages of bad loans are expected to flow into the market and push prices down this year, a number of industry insiders have told Caixin.

China’s Hainan province has doubled down on property purchasing curbs to ward off speculators in the wake of the central government’s decision to make the island a free-trade zone.

Hong Kong brokerages will be allowed to provide locally focused research notes and advisory services to Chinese mainland clients, in China’s latest step to integrate its stock markets with more advanced global counterparts.

Companies

Embattled telecom equipment-maker ZTE Corp. said it has taken actions under U.S. law to protect itself in the face of life-threatening sanctions from Washington, as foreign media reported rival Huawei is being probed in a similar case.

China Huarong Asset Management Co. Ltd., the country’s largest distressed-asset management company, has started selling its overseas assets — a week after its former chairman Lai Xiaomin was put under investigation for "serious violations of party discipline and law.”

A Shenzhen-listed unit of CEFC China Energy lost around 2 billion yuan in market capitalization in two days after trading resumed following a suspension of more than a month. Investors are concerned over the embattled conglomerate’s heavy debt and the January arrest of the company’s founder.

An executive of a China-backed private equity fund is facing jail and fines for insider trading related to a proposed 2016 takeover in the U.S. semiconductor industry.

Calendar

April 30: National Bureau of Statistics releases Manufacturing Purchasing Managers Index (PMI), Non-manufacturing PMI, and Composite PMI Output index for April

April 30-May 1: Labor Day public holiday, China's financial markets closed

May 2: Caixin China General Manufacturing PMI for April

May 4: Caixin China General Services Business Activity Index for April

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