US Treasury Secretary Janet Yellen this week said China’s slowdown was a “risk factor” for the American economy. Weaker imports of major commodities also threatens producers from Australia to Brazil,while softer demand for electronics will impact trade-dependent economies like South Korea and Taiwan.
The CSI 300 Index,a benchmark of onshore China stocks,ended 0.2 per cent lower even after Bloomberg reported that Chinese authorities may cut the stamp duty on stock trades for the first time since 2008 — news that helped boost sentiment after the rate cut and weak Chinese data failed to impress investors.
While some economists were more encouraged by the central bank’s actions than others,all seemed to agree on one thing:Authorities have more work to do on both the monetary and fiscal side.
“The PBOC rate cuts today set the stage for looser liquidity conditions that could eventually support an even bigger fiscal push,” said Louise Loo,lead economist at Oxford Economics Ltd. “So that is encouraging.”
Economists at ANZ,including Xing Zhaopeng and Raymond Yeung,said the rate on the PBOC’s one-year policy loans may need to be reduced to 1.2 per cent — a terminal rate implying additional cuts of 130 basis points. Rate cuts,they said,will “smooth the shocks and buy time for structural reforms” such as upgrading industry,greater urbanisation and more deleveraging.
With no elections to worry about,and more power than any leader since Communist Party founder Mao Zedong,Xi is betting that he can ride out the downturn.
“China’s slowdown is more structural than cyclical,” they said.
Welfare trap
Still,some economists have said the government’s strategy so far is doing little to move the needle,especially as the property crisis worsens.
“The PBOC wants to get the banks to lend,but it seems it’s not been successful as both loan demand from households and credit-worthy corporations have been weak,” said Redmond Wong,market strategist at Saxo Capital Markets. He said that’s because banks have been reluctant to lend to property firms and other private companies,given the uncertainty surrounding the ability of those businesses to pay back their debts.
Country Garden,once China’s largest developer by sales, faces potential default despite being a recipient of government-led support for the sector. Fears that problems at Country Garden and other developers are spilling over elsewhere have been exacerbated by reports of payment problems linked to Zhongzhi Enterprise Group,a multi-billion-dollar shadow banking firm.
“The latest financial problems with one of the country’s largest developers throws cold water on recent policy measures aimed to revive a troubled sector,” said David Chao,global market strategist for Asia Pacific ex-Japan at Invesco.
The government’s inability to stem the property downturn or boost confidence among businesses and households has led some to argue for more dramatic measures. Cai Fang,a central bank adviser,this week said it was “necessary to use all reasonable,legally compliant and economic channels to put money in residents’ pockets”.
Writing cheques for consumers,though,has long been viewed as a non-starter within a government that has repeatedly warned against the trap of “welfarism”.
Andrew Batson,China research director for Gavekal Dragonomics,wrote in a note earlier this month that Chinese policymakers were probably reluctant to use direct transfers to households as a short-term stimulus due to fears of “setting a fiscally destabilising precedent”.
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“The next time China falls short of potential growth and full employment,the political pressure to roll out household transfers again would be overwhelming,” Batson wrote. “What started as a one-off policy response could become entrenched as the expected response to any growth slowdown,and would add to government deficits and debt over many years rather than just one.”
With no elections to worry about,and more power than any leader since Communist Party founder Mao Zedong,Xi is betting that he can ride out the downturn.