Return to 2014

China will pull demand forward as it did in 2014, but thus far the effort is smaller than in 2014 despite risks being higher.

SCMP: China to speed up US$199 billion of domestic spending to protect growth during US trade war

The State Council, the state cabinet, said on Monday that it would adopt a “more proactive fiscal policy” and would speed up raising and spending 1.35 trillion yuan (about US$199 billion) for local government, designated to be spent on infrastructure.

Back in 2014 I wrote: One More Time: No Stimulus

The Chinese leadership has been extremely consistent in saying there will be no stimulus. I can understand if investors think there will be a stimulus once there are obviously problems in the economy, but the leadership has said it will not repeat 2008.

If there is a crisis in 2014 or 2015, it will be worse than 2008 because by nearly every measure (except the stock market) is at an elevated level: more debt, more real estate supply, higher home prices, greater inventory, etc. If the government is saying it won't repeat 2008, then I take them at their word and assume they will not launch a massive stimulus program to save the economy until it is too late, and even then, they may decide it is too late and decide instead to see a real recession through to the end.

In the People's Daily Overseas Edition, the point about no stimulus was driven home yet again and it specifically addresses the investment banks that are saying China will cut the reserve requirement ratio (RRR) or make other adjustments to aid the economy. Short of banging them on the head with the latest 5-year plan, I'm not sure what else it will take for people to get the message.

There was no crisis because officials changed their tune slowly, in mid-2015 and then with full force in February 2016. They also blew a stock market bubble from late 2015 to mid-2015. Still, data such as real estate and fixed asset investment did hit new lows. Real estate investment went negative for five straight months (single-month year-on-year, the cumulative YTD growth never went negative) in late 2015.

While it said no large stimulus was coming, Chinese leadership did launch a mini-stimulus. It was similar to what it is doing today, but larger in scale. From June 2014: Chinese Official Admits There Is A Mini Stimulus; Long-Term Reform Favored Over Short-Term Stimulus

Shen Jianguang of Mizuho said, "We won't see a repeat of the 2008 stimulus plan. In fact, the mini stimulus is this government's response to the hard landing risk, they are inclined to use reform and unleash market forces, such as through decentralization, speeding up approvals, to nurture and develop new growth and long-term competitiveness." He also says that if the RRR isn't cut, then the various stimulus policies will have limited effect. He also gives three reasons why a RRR hasn't come yet: the government wants to force reform; the government is waiting for a signal to cut; or the government is optimistic about the economy.

Another similarity to today is that local governments were impaired.

In July 2014: Chinese Local Governments Have 10 Trillion in Stimulus Planned, But No Way to Pay For It

An unofficial and informal count by Chinese media puts recently added mini-stimulus projects at ￥10 trillion. Now if only they could sell some land or borrow to pay for it.

Data puts local government investment projects at ￥14.7 trillion through May, an increase of 17.6% yoy, the slowest growth rate since 2002. Sichuan increased its planned projects by 40% in March to nearly ￥3 trillion. Guangdong, Tianjin, Hainan and 5 other municipalities and provinces announced ￥7 trillion in projects. Analysts say "mini-stimulus" is now an all-year round effort by local governments.

However, Stephen Green of Standard Chartered says "local governments dream big, but what they can do is limited." Lin Jiang, professor of Public Finance and Taxation at Lingnan University, says that unless the central government decides to do a "strong" stimulus, the mini-stimulus will stay mini.

The government was doing a lot more in 2014 and it wasn't enough to avert what unfolded in 2014 and 2015. A lot of that stimulus relied on borrowing, but that was slowing.

In August 2014: Chinese Media Still Asking How To Pay For Mini-Stimulus?

China's mini-stimulus has two parts. One is the acceleration of investment projects, pulling economic activity into the current quarters. The other part is increased investment. For the latter, the question asked by Chinese media is how to pay for it?

In July, I posted: Chinese Local Governments Have 10 Trillion in Stimulus Planned, But No Way to Pay For It

This latest unofficial count is at ￥6 trillion in stimulus, but with tighter controls on shadow banking, concern about local government debt levels and declining land sales, local governments find their finances constrained. If there's no way to pay for projects, there will be no stimulus.

In some ways 2018 is also a mirror of 2014. Back then the shantytown renovation policy was getting started and the PBoC provided credit to the China Development Bank through the newly created Pledged Supplementary Lending (PSL) channel. See: China central bank gives CDB 1 trillion yuan

Today, China reduced the shanytown lending because local governments are already deeply indebted and there's worry about defaults...

The Shanghai Composite was more attractive heading into the 2015 bubble run. The Chinext had also been in a bull market going back to 2012.

China's government may do more, but so far it is doing far less than in 2014. The more energetic efforts of 2014 failed to stop a significant slowdown. Market disruption didn't completely end until late 2016 when forex reserves stabilized.

In 2018, the scale of everything has increased. Coming into 2014, China had a debt-to-GDP ratio of about 270 percent. Coming into this year it was closer to 320 percent. Some figures go higher, some lower. Suffice to say that if China slowed credit growth to 1 percent below nominal GDP growth of 10 percent (official), its expected real growth rate in 2018 would barely miss hitting 0 percent. China has an extremely narrow window in which it can pull off a deleveraging effort and it cannot avoid a significant slowdown absent some positive shock. If external factors such as a rising U.S. dollar add pressure, it will become more difficult.