The slow boat to China gains more horsepower

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The slow boat to China gains more horsepower

China is in the economic headlines again, this time as a result of positive intervention by from the Peoples Bank of China (PBoC).

Against a background of GDP growth, all western countries would very much like achieve a growth rate of 6.7%. Whilst above target, the Chinese government have felt the need to act by pulling various fiscal and monetary levers to support future economic growth.

Infrastructure spending is an integral part of economic growth for China. This has been on the agenda since 2013 with the planned $900bn ‘Belt and Road Initiative’ aimed at improving the country’s connectivity to Asia and the rest of the world. However, officials have seen a 36% year on year reduction in investment commitment from local government and have decided to act. This is because members of the PBoC State Council accused local government of acting inefficiently and sitting on fiscal revenue rather than using it to pursue infrastructure needs. By failing to spend as planned supply side improvements are being supressed and aggregate demand curtailed, two factors which if managed effectively can help fuel economic growth.

As well as requesting a change in the behaviour of local government to a pro-growth style, financial institutions are starting to be asked once again to make liquidity more accessible; including through shadow banking channels which hitherto have been clamped down on.

Debt driven growth has been in the veins of Chinese business and government since 2008 and it seems the pressures from the US may have the effect of putting President Xi Jinping’s deleveraging plans on ice. The second fiscal lever pulled is a $10bn tax cut for corporate investment in Research and Development in oil, gas, transport and telecommunications, all sectors which aim to enhance global connectivity and demand.

The announcements coincide with recent monetary stimulus measures including the PBoC’s purchase of Rmb502bn ($74bn) corporate bonds through the Medium-term Lending Facility (MLF). At the same time relaxed reserve requirements at the banks will free up $100bn for lending by making finance more accessible. This typically fuels business activity and investment.

In an economy with a GDP of $14trn the measures outlined may seem like a drop in the ocean, but this is one of largest monetary injections the economy has seen in a single day. It seems the government are navigating through a slowdown in growth and a debt laden economy and it is a difficult balancing act to pull off requiring skill and judgement. The policy has been well received by markets and on Tuesday, the CSI 300 Index experienced the best three-session run since March 2016 (up 5.5%) expressing confidence in China’s resilience against US protectionism.

The intervention by the PBoC proves again that Chinese Central Government is capable of making decisions, implementing quickly and demonstrating the economy’s ability to respond to stimulatory policy initiatives.

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