26 Mar 2014
Will the Chinese government ease policies? - Nomura
FXStreet (Bali) - Nomura Economists Zhiwei Zhang, Changchun Hua and Wendy Chen, look at the possibilities of the Chinese government announcing a new stimulus package to support the economy, noting easing is likely in Q2.
Key Quotes
"We believe the government will ease both monetary and fiscal policies in Q2. In the absence of easing, we think the probability of GDP growth dropping to below 7% in Q2 or Q3 would be higher than 50%. Growth momentum is slowing quickly, with the latest signs in the further decline of the HSBC flash PMI in March and the sharp drop of new orders as indicated in both the HSBC PMI and the Q1 corporate survey conducted by the People's Bank of China (PBoC). Domestic and overseas order indexes of the PBoC survey dropped significantly to 44.4 and 45.4 in Q1, respectively, their lowest in almost five years. Another worrying sign is that growth of property investment looks set to slow in coming months, as its leading indicator, property transaction growth, slowed sharply in January-February."
"Views in the market have differed on whether policy easing is likely. Indeed, our view of a reserve requirement ratio (RRR) cut in Q2 differs from the mainstream view of no easing. The government has made it clear that 7% growth is the "lower bound" that they will tolerate, so the key difference between our view and the mainstream view appears to be the underlying strength of the economy – can growth stabilise without a major change of policy stance? We believe it cannot, as tight labour market conditions suggest that potential growth has already dropped to around 7% or below, and from a cyclical perspective the cumulative policy tightening since mid-2013 will likely damage investment momentum in coming quarters unless the policy stance loosens."
Key Quotes
"We believe the government will ease both monetary and fiscal policies in Q2. In the absence of easing, we think the probability of GDP growth dropping to below 7% in Q2 or Q3 would be higher than 50%. Growth momentum is slowing quickly, with the latest signs in the further decline of the HSBC flash PMI in March and the sharp drop of new orders as indicated in both the HSBC PMI and the Q1 corporate survey conducted by the People's Bank of China (PBoC). Domestic and overseas order indexes of the PBoC survey dropped significantly to 44.4 and 45.4 in Q1, respectively, their lowest in almost five years. Another worrying sign is that growth of property investment looks set to slow in coming months, as its leading indicator, property transaction growth, slowed sharply in January-February."
"Views in the market have differed on whether policy easing is likely. Indeed, our view of a reserve requirement ratio (RRR) cut in Q2 differs from the mainstream view of no easing. The government has made it clear that 7% growth is the "lower bound" that they will tolerate, so the key difference between our view and the mainstream view appears to be the underlying strength of the economy – can growth stabilise without a major change of policy stance? We believe it cannot, as tight labour market conditions suggest that potential growth has already dropped to around 7% or below, and from a cyclical perspective the cumulative policy tightening since mid-2013 will likely damage investment momentum in coming quarters unless the policy stance loosens."