China stimulus feared ‘too little, too late’
A year ago, the rallying cry among Chinese policymakers was deleveraging the economy — but now the country’s senior leadership is moving quickly to revive bank lending in a fight against flagging economic growth.
The change in tactics, underlined by a Rmb900bn ($126.4bn) boost to bank lending capacity last week, is a sign that China’s policymakers acknowledge they must do more to support the country’s economy as US tariffs on Chinese goods take a greater toll than originally expected.
But investors and economists worry that China’s overall response to counteract the slowing growth trend has been too little, too late.
“We believe there’s an increasing risk that the policy is running behind the curve,” said Helen Qiao, chief greater China economist at Bank of America Merrill Lynch. “Policymakers are waking up to the fact that there is no cushion left for 2020.”
For more than a decade, Beijing has steered between periods of urgent demand for credit and spells when it has tried to introduce reforms to quell runaway lending and overheating stock and property markets.
Last year, China embarked on a series of reforms to combat debt-fuelled growth and risky off-balance-sheet lending known as shadow banking. But the unexpected escalation of the trade dispute with the US in recent months has forced the rollback of some of those reforms — putting Chinese lending back on to an expansionary path.
The two countries have continued to slap tariffs on each other’s exports, with the latest round of levies hitting Chinese manufactured products on September 1. And evidence is growing that the trade war is starting to bite: China’s exports dropped unexpectedly in August by 1 per cent.
Many economists have lowered their growth targets to 6-6.1 per cent for this calendar year, a slower rate of expansion than China has experienced for decades and at the lower end of its target growth range of 6-6.5 per cent.
The largest stimulus bid of the year so far, Friday’s announcement of a cut to banks’ reserve requirement ratios, followed the creation of a new benchmark lending rate adopted in August that is expected lower banks’ cost of capital in the coming months.
The government has also sought to spur spending on public infrastructure projects such as roads and bridges. It has expanded quotas for the amount of special infrastructure bonds — whose proceeds are earmarked for specific projects — that local governments are allowed to sell by about 60 per cent this year to Rmb2.15tn.
Still, many economists say the measures will fall short of what is needed to reinvigorate China’s growth rate.
“I don’t think this is enough,” said Larry Hu, head of China economics at Macquarie Group. “At this moment, there is not enough demand for credit so you have to create artificial demand in areas like infrastructure and property.”
The government will need to push banks to lend to local government projects in order to drum up more economic activity, Mr Hu said.
A more controversial option would be to loosen some shadow banking regulations that have cut local governments and property developers off from access to credit, he suggested.
For more than a decade, China has relied on demand for housing to help power its economy but, over the past year, the government has taken a stricter stance on keeping housing prices under control. Policymakers have this year frequently repeated the mantra that “houses are for living, not for speculation” — signalling that they would not use the industry, which makes up about 25 per cent of Chinese gross domestic product, to drive growth.
But in order to achieve this year’s economic targets, the government may be forced to increase its support for property developers.
“Right now you can’t ignore the property sector,” said Ting Lu, chief China economist at Nomura. “The current stimulus plan is reasonable for the long term but if they want to stabilise the economy in the short term they can’t exclude the property sector.”
Opening up the shadow banking taps, or allowing for speculative investment into the property sector, would be painful moves for the central government to take after more than a year of reforms in those areas. China’s banking sector is already under pressure from a build-up in non-performing loans. Increasing credit supply could deepen the bad debt problems that some banks are grappling with.
But some analysts believe the government will be able to hit the delicate balance between credit controls and fuelling a bubble, by spurring sufficient bank lending to meet its target growth rate without letting excess lending run amok.
Yu Song, chief China economist at Gao Hua Securities, said: “Policymakers will probably restrict the magnitude of the loosening to be just sufficient to achieve this goal.”