We believe China’s substantial monetary and fiscal stimulus is finally translating into stronger economic activity. Whether this boost is sustained, or fizzles out under the weight of the large structural imbalances in the Chinese economy, may be one of the defining features of this year’s global economic and investment landscape.
China’s economic stimulus started in late-2014, and continues into the present. On the monetary policy front, the People’s Bank of China (PBoC) has cut benchmark lending rates from 6% to 4.35% over the period, and has lowered required reserve ratios – the share of consumer deposits that commercial banks are required to hold with the central bank – from 20% to 17%. Meanwhile, fiscal policy has also been loosened; increased government spending has led to a rise in the budget deficit as a share of gross domestic product (GDP) from 1.4% in 2014 to 3.1% in 2015, and this is likely to touch 5% over the next few years.* Policymakers have also enacted a range of ad hoc stimulus measures, such as relaxing property purchase regulations, adding liquidity to the equity market, and engineering a (ongoing) depreciation of the renminbi against a basket of other currencies.
Market Realist – China brings out the big economic guns
The Chinese (FXI) (MCHI) government initiated various stimulus measures to arrest the slowing growth. Currently, the bank lending rate is at a record low. Similarly, the reserve ratio has also been cut five times in the past year to support economic growth as downward pressures remain strong.
In order to pump up the economy, the Chinese government increased spending from 10.9 trillion yuan in 2011 to 17.6 trillion yuan in 2015. With the rise in government spending, the budget deficit swelled from 1.1% of the GDP to 2.3% during the same period. In the first quarter, fiscal spending increased 15.4% year-over-year. However, it only grew 4.5% in April. China’s (GXC) targeted fiscal spending growth is at 6.7% for the current year.
Liberal real estate rules
After record credit growth and numerous infrastructure projects, China initiated several measures to boost economic activities in the country. The government relaxed rules on property sales to foreigners. Foreign individuals and businesses can now purchase more than one property in the country. Earlier, foreign buyers were only allowed to buy one property. Similarly, foreign institutional investors aren’t required to pay registration fees on loans availed to fund their property purchases and while settling foreign exchange transactions.
Boosting market confidence
The central bank also pumped 130 billion yuan into the financial system to encourage more borrowing. To allay fears of an additional market meltdown, China’s regulators extended a ban on stock sales by shareholders who hold more than 5% of a major listed stock.
In order to make Chinese goods more attractive in the global (VT) (VXUS) markets while pushing import substitution at home, the Chinese government devalued the currency in 2015 and early 2016. The yuan depreciated 6.5% over the year. Currently, it’s trading at 6.6 yuan per dollar.
In the next part of the series, we’ll discuss some of the indicators that suggest an economic turnaround. We’ll also discuss whether the turnaround is expected to last longer. We’ll see how it will impact the stock market.