Hopes For Major Chinese Fiscal Stimulus Fall Flat At People’s Congress

Back in October, the latest credit impulse in China just rolled over and died.

Ahead of the actual news, MNI said “one source familiar with the data said new loans by the Big Four state-owned commercial banks in October plunged to a level that hasn’t been seen for many years.”

Sure enough, when the numbers hit, it wasn’t a pretty picture. RMB new loans came in at just CNY514bn in October – consensus was far higher at CNY800bn. That was down 6.3% Y/Y. Total social financing fell 29% Y/Y to CNY447 billion, down sharply from September’s CNY1.3 trillion print.

So what, did China do you ask? Well, they unleashed massive fiscal stimulus:

The deluge of fiscal spending was at least the most since May 2014, and seemed to prove that between an acute over-capacity problem and jitters from the reverse-wealth-effect created by last summer’s stock market collapse, businesses and consumers had no desire to borrow, while rising NPLs meant banks were reluctant to lend. As we said at the time, it looked like Beijing was finally prepared to acquiesce to incomparable, pet-rock hating PhD economists like Citi’s Willem Buiter who said the following summer:

Fiscal policy can undoubtedly come to the rescue and prevent a recession in China. The first-best would be for the central government to issue bonds to fund this fiscal stimulus and for the PBOC to buy them and either hold them forever or cancel them, with the PBOC monetizing these Treasury bond purchases. Such a ‘helicopter money drop’ is fiscally, financially and macro-economically prudent in current circumstances, with inflation well below target and likely to fall further.

As we never tire of mentioning, that idea is absurd on its face: you’re simply printing one paper liability and buying it with a another paper liability that you also print.

In any event, fast forward to January, and credit impulse was back with a vengeance, as the Chinese created a mammoth $520 billion in credit ahead on the Chinese New Year. Or, visually:

So China created half a QE3 in the space of just a month, or, as we quipped, “Minsky wants his chart back”.

The reason for the surge was largely the result of frontloading loans mostly at smaller banks, as well as lending to government projects in the first year of 13th Five Year Plan, which helped to boost loan growth. Many economists had expected loans to slow sharply in February as lending to government projects wound down.

However, it turns out this was just the start of China’s latest policy, which is really just a return to its old policy of flooding the economy with debt: as Market News reports expectations that “January’s surprisingly strong new loan growth would prove temporary may have been premature as bank officials in a number of Chinese cities say February new loans look to be just as strong, even with a week-long holiday in the middle of the month.”

According to MNI, new loans so far in February were similar to the levels during the same days of January. The total so far in February is seen at around CNY2 trillion already (and that was weeks ago).

One month and one RRR cut (the fifth since early 2015) later, and perhaps, based on its own experience with expansionary monetary policies that have thus far failed to produce growth or perhaps by watching DM central banks plunge headlong into NIRPdom without making even so much a small dent in the disinflationary impulse, China has come to terms with that fact that perhaps a bit of fiscal stimulus may be the answer.

Well, “a bit,” turned out to be the right characterization, because on Saturday, Beijing said it will aim for an economic growth rate between 6.5-7 percent, (we already knew that) with a consumer inflation target of around 3 percent and money supply expansion of around 13 percent, according to a series of draft reports ahead of the opening of the 12-day parliament.

“Many investors had been hoping China would post an aggressive target for fiscal spending to prop growth,” Reuters notes. “But the draft goal of running a fiscal deficit equivalent to 3 percent of GDP, while up from the previous year’s target of 2.3 percent, still disappointed some who had hoped for a number closer to 4.”

As so, sorry Willem Buiter:

“That’s still the most red ink on the fiscsl account since 1979 and up markedly from last year’s 2.3%, but it’s not enough and should be increased,” a central bank advisor Yu Yongding told Reuters on the sidelines of the meeting.

And here’s an important point from Zhou Hao, economist at Commerzbank in Singapore, also quoted by Reuters: the low figure may reflect concerns that a higher number would signal tolerance for another spree of debt-fueled growth such as that Beijing embarked on in 2009.

In other words, getting too agressive here might have sent the wrong message that, having failed to make a swift transition from the smokestack, investment-led economy to a consumption and services led model, China is simply prepared to go right to back to what (used) to “work.” But that would simply plunge the coutnry back into an ultimately untenable position by exacerbating the acute overcapacity problem and thus driving up NPLs and down demand for credit (well, unless it’s credit companies are taking on to pay off old debts).

Primier Li also reiterated Beijing’s intention to address zombie companies through a combination of mergers, bankruptcies and debt deals.

As for that all important indicator of just where Chinese society is heading: 5.6 million state workers will be laid off in the next two to three years. Long torches and pitchforks.

So if China did not deliver the much desired (and needed by the market) stimulus (which was originally scheduled for last weekend’s disappointing G-20 meeting where nothing concrete emerged either due to Schauble vocal opposition to any more global monetary or fiscal stimulus) what did the first day of China’s National People’s Congress deliver? A lot of promises as the following list from Reuters shows. A whole lot of promises, none of which China will achieve.

To target 2016 GDP growth of between 6.5 percent and 7 pct.
To target 2016 CPI around 3 pct.
To target 2016 M2 growth target around 13 pct.
Sees 2016 budget deficit at 3 pct of GDP.
To use various monetary policy tools to maintain reasonable liquidity.
To continue to implement prudent monetary policy.
To continue to implement proactive fiscal policy.
Will keep renminbi exchange rate basically stable in 2016.
Will continue to improve yuan exchange rate regime in 2016.
To deepen reform of financial sector.
To further liberalise interest rates.
To deepen reform of state owned commercial banks.
To reform stock and bond markets.
To promote sound development of multi-level capital market.
To crack down on unlawful activities in the securities and future markets.
To ensure no systemic or regional financial risks arise.
To strengthen unified macroprudential management of foreign debt.
To launch Shenzhen-Hong Kong stock connect pilot at appropriate time.
To establish catastrophe insurance system.
To develop internet finance.
To develop inclusive and green finance.
To insure proportion of direct financing is increased.
To develop private banks.
Sees growth in outstanding social financing of around 13 pct in 2016.
To launch trial allowing commercial banks to participate in debt equity investment for small businesses.
To establish standard financing mechanisms for local governments to issue debt.
Says China to issue 400 billion yuan of special local government debt in 2016.
To keep urban registered jobless rate below 4.5 pct in 2016.
Will create 10 million new jobs in 2016.
Will quicken supply-side structural reform.
Will appropriately deal with zombie firms in 2016.
To address issue of zombie firms using mergers, reorganizations, bankruptcies and debt restructurings.
Will push ahead with reform of state-owned firms.
Says will resolve overcapacity in industry, focus on steel and coal.
Says 100 billion yuan in subsidies will be used primarily to resettle laid off employees.
Says convinced Hong Kong, Macao will maintain long-term prosperity and stability.
Says will oppose Taiwan independence separatist activities.
Says will safeguard peace and stability in Taiwan Strait.

Quotes from Li’s speech:

“Innovation is the primary driving force for development and must occupy a central place in China’s development strategy.
“We must make consistent efforts to encourage the public to start businesses and make innovations.”
“We should strive to achieve major breakthroughs in basic research, applied research, and research in strategic and frontier fields by 2020.”
“We should also expand major infrastructure projects, with the aim of increasing the length of high-speed railways in service to 30,000 kilometres and linking more than 80 percent of big cities in China with high-speed railways, building or upgrading around 30,000 kilometres of expressways, and achieving full coverage of access to broadband networks in both urban and rural areas.”
“Over the next five years, we should aim to ensure that water consumption, energy consumption, and carbon dioxide emissions per unit of GDP are cut by 23 percent, 15 percent, and 18 percent, respectively, and that forest coverage reaches 23.04 percent.”
“We will promote greater user of Chinese equipment, technology, standards, and services in the international market, and help Chinese manufacturing brands gain international recognition.”
“We wish to actively negotiate and sign the Regional Comprehensive Economic Partnership agreement. We will help speed up negotiations on the establishment of the China-Japan-ROK free trade zone. We will work to make progress in negotiations on investment agreements between China and the United States and between China and the European Union.”

REPORT FROM NATIONAL DEVELOPMENT AND REFORM COMMISSION

Says 2016 retail sales of consumer goods expected to grow 11 pct.
Says 2016 fixed asset investment expected to rise around 10.5 pct.
Says 2016 non-financial outward direct investment to reach $130 billion, up 10 pct.
Says 2016 non-financial foreign direct investment in China to reach $128 billion.
Says 2016 carbon intensity to be cut 3.9 pct.
Says will keep total energy consumption under control in 2016.
Says will work to lift price controls in power, oil and natural gas.
Says will improve the pricing mechanism for refined oil products.
Says will increase support to help turn around steel and coal sectors.
Says to control expansion of coal production and coal power generation capacity.

REPORT FROM FINANCE MINISTRY