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Thursday, May 24, 2012
Goldman Sachs: Chinese growth may start to trend back up in May
Since the start of May, we have seen a number of policy announcements and actual adjustments highlighting the government’s rising concern on slowing activity growth and clear desire to loosen policy. Premier Wen first commented on the need to make maintaining growth a more important policy priority during a field trip in Wuhan over the weekend. He then held a meeting at the State Council on May 23 reiterating the point by stating that policy adjustment/loosening needs to be stepped up. There were many measures mentioned in the announcement, including corporate tax cuts and the need to boost consumption. While we think such news is welcome, we believe the magnitude of the likely impact on the economy will be fairly limited. This is highlighted by the recent mini stimulus package on energy-efficient consumer products including LED, home electronics and cars which amounted to a total of Rmb365 bn, which is likely to be less than 0.1% of expected 2012 GDP. Instead, we believe the key measures to a short-term economic recovery will be to supply sufficient amount of liquidity and step up fixed asset investment (FAI) project construction. Despite the continued news flow on weak loan growth by the big four commercial banks in the first 10/20 days of the month, we maintain our view that in recent months, most of the loans would be extended towards the last days of the month, so the news contains very limited useful information in forecasting May’s total lending. Besides, lending by big commercial banks appear to be more back-loaded compared with small banks so month-to-date system-wide lending may not be quite as weak either. We believe the People’s Bank of China (PBOC) already intended to loosen liquidity conditions at the start of the month as evident by the clear fall in the interbank interest rate, even before the reserve requirement ratio (RRR) cut on May 12.
Given the latest clear direction from the State Council to step up policy adjustment, it will be surprising if the PBOC does not want to loosen even more. This is especially in light of the rapid fall in food prices since the start of May, which probably occurred as the result of the catch-up in supply of vegetables following a period of bad weather conditions. If this trend is maintained, we will likely see a further fall in CPI inflation in May and June possibly to sub-3% levels, which will leave more room for further policy loosening. There have been many concerns on the apparent lack of loan demand and the ability of the government to loosen even if it wanted to. We believe the apparent lack of demand is conditional on the price of loans (the actual interest rate which is at a premium to the benchmark interest rate) and other restrictions such as loan-to-deposit ratio requirements and self-owned capital requirements for FAI project lending. As the funding cost of banks goes down amid more ample liquidity in the interbank market, they will have more ability to lend at a lower rate.
As the government provides more fiscal support to new and existing FAI projects, the number of qualified borrowers will increase as well. Various anecdotal evidence at the industrial level suggested that the National Development and Reform Commission already started to step up FAI project approvals in April, which reflected the fact that it has been particularly concerned about the economic slowdown within the government. One thing to note is that the importance of new project approvals is not quite as high as many believe, which is one key difference between this round of policy loosening and the aggressive Rmb4 tn package in late 2008-early 2009. Back then, it was vital to start a large number of new projects or there would be no way to inject that amount of liquidity into the economy, because the size of the stimulus was very large and the number of existing projects small as a result of years of containment on FAI to control inflation. Now, there are a large number of existing projects which either stopped construction or slowed the pace of construction because of a lack of funding. So although the approval of new FAI projects will still be helpful, it is less important than it was back then. Having said all this, given the very short lag between changes in policy stance and the real economy, we suspect hard economic data will start to show some improvement in the very near term, possible already with May data, despite the fact that the survey data including the PMIs may still be on the weak side.