CDT Money: Stimulus 2.0?

After the Chinese government stepped up public statements in support of a stimulus to aid its sputtering economy, analysts and investors are now left to speculate what form a potential fiscal package may take. State media, however, hurried to temper expectations of an injection as large as the one made during the 2008 financial crisis. Instead, economists at Credit Suisse predicted last week that spending on investment will likely come between 1 and 2 trillion yuan, well short of the 4 trillion yuan spent on investment the last time around.

The Financial Times’ Kate Mackenzie summed up the situation early last week:

Two things that we know so far… sort of:

– It probably will be along the lines of the previous stimulus in that it will focus on infrastructure, construction projects, and some consumer purchase incentives.

– It definitely won’t be as big as the last stimulus which kicked off in 2008 and totalled Rmb4tn. And official media report puts the new one at Rmb1tn.

Without much visibility into the details of Stimulus 2.0, the government began to make policy announcements this week aimed at promoting growth. The  has agreed to revive a “cash for clunkers” program that gives consumers financial incentive to trade in their cars, the Ministry of Industry and Information Technology hinted at a possible five-year plan for the biotechnology industry, and the  announced that it will offer subsidies ranging from 100 to 400 yuan on energy-efficient televisions and air conditioners sold beginning June 1. In fact, The Wall Street Journal reported on Tuesday that the government has already fast-tracked a number of investment projects for approval this year:

In the first four months of the year, China’s economic planning agency, the National Development and Reform Commission, has approved more than twice as many investment projects as it did in the same period a year earlier, an analysis by The Wall Street Journal reveals.

In the first four months of the year, the NDRC, which screens all large investment projects, approved 868 of them, up from 363 a year earlier, according to public notices posted on its website over the course of the year. That included 254 projects in April alone—up from 213 in March and more than three times the 74 projects approved in April of 2011.

The investment projects range from new steel mills to hospitals and water-treatment plants to clean-energy projects. The rapid pace of approvals appears to have been sustained in May, although the full data won’t be available for some weeks, as the NDRC often delays official announcements after approvals have actually been granted.

Amid all of the stimulus talk, data from China seemed to only confirm the bearish prognosis for the economy. The official purchasing manager’s index (PMI) reading for May snapped five straight months of growth and fell back to 50.4, just north of the 50 mark that signals the difference between an expansion and contraction for China’s factory sector. After diverging for months with the unofficial HSBC flash PMI, a survey which focuses more on the health of smaller private enterprises as opposed to state-owned manufacturers, the two readings are now pointing in the same direction.

Observers have expected additional tweaks to monetary policy to accompany any fiscal stimulus, including further reductions in the reserve requirement ratio. But with inflation seemingly under control, and despite warnings from Chinese economists against easing policy too quickly, the Shanghai Securities Journal reported that China may cut interest rates sooner rather than later. From The People’s Daily:

Peng Wensheng, chief economist with the China International Capital Corp, told the newspaper that the central bank is highly likely to slash interest rates soon, and may further cut banks’ reserve requirement ratio as many as three times within the year in an effort to stabilize the real economy.

The manufacturing purchasing managers index (PMI) ended five straight months of growth in May and retreated to 50.4 percent from 53.3 percent in April, the China Federation of Logistics and Purchasing said Friday. Zhang Liqun, a researcher with the Development Research Center of the State Council, said the retreat of the PMI was in line with the country’s slowing economic growth.

Zhang was quoted by the newspaper as saying that China is likely to further lose steam with a decline in the sub-index for new orders, pointing to even weaker future factory activity.

Foreign Listings Closer to Reality

Reuters reports that China is weighing the possibility of allowing overseas companies to list on its domestic stock exchanges and raise funds from local markets:

The government will draft rules for overseas firms to list in China and make necessary preparations for the opening, according to the documents signed by eight government departments, including the top planner, the National Development and Reform Commission.

China has been talking about the launch of an international board in the Shanghai Stock Exchange to encourage foreign listings. It was about to kick off the new board in the second half of last year but the move was delayed by the erupting euro zone debt crisis.

The government would also consider letting foreign organizations issue bonds, mutual funds, while expanding the channels for domestic investors to invest in overseas securities, the document said.

China has so far permitted only a handful of international organizations to sell limited numbers of bonds in the country, while Chinese citizens are allowed to trade foreign securities only via the Qualified Domestic Institutional Investors (QDII) in a limited quota system.

Property Market Close to the Edge?

The China Daily reports that housing prices in China have fallen to a 16-month low. From over-investment to funding problems to upcoming debt maturities and sluggish sales, The Financial Times’ Kate Mackenzie asks whether Chinese real estate has reached a tipping point:

Chinese real estate investment reportedly rose 23.5 per cent in Q1, year-on-year. And yet new construction rose only 0.3 per cent and sales of residential and commercial property fell 14.6 per cent. As Patrick Chovanec points out, despite accounting for the aforementioned 13 per cent of GDP, there was little questioning of the incongruence of these Q1 2012 numbers which showed steeply rising investment in a sector that was actually shrinking in terms of revenue.

And yet, while we and others have wondered about a wave of developer defaults was imminent, there’s been only the occasional reports of smaller developers running into difficulties.

It *might* be about to change, however. Inventories are well past the 12-month mark and are forecast to reach about 36 months by the end of this year, according to Standard Chartered. Last week we wrote about some research from Nomura arguing that a month-on-month collapse in housing starts in April (down 27 per cent) signalled a turning point.

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