China Has More Reasons to Stimulate Economy Beyond Trade Tension
(Bloomberg) -- The case for China to keep up stimulus to the economy strengthened, with further incoming evidence that the recovery is not yet self-sustaining as negotiators attempt to stave off an escalation of the trade war with the U.S.
Despite upbeat inflation and import data released in the past two days, the recovery remained fragile in April: Core consumer inflation, stripping out volatile food and energy prices, edged down. The main factory gauge pulled back, exports unexpectedly fell, fiscal income growth slowed, and new credit trailed all economist estimates.
After a stronger-than-expected March, optimism that China’s slowdown had abated gave rise to signals that the pace of stimulus for the rest of the year would be trimmed. With the abrupt turn in the trade talks now threatening economic growth once more, that decision is back in play.
“Beijing’s policy focus is sticking to stabilization, rather than chasing a rebound,” said Zhuang Bo, chief China economist in Beijing at research firm TS Lombard. “Some parts of the economy are recovering and there is evidence of green shoots. Obviously, if the trade negotiation goes south with tariff hikes this week, China’s economic policy priority will shift back to easing and stimulus.”
Even before President Donald Trump sent China’s stocks and currency tumbling this week, policy makers have had reasons to keep stimulus in place.
Aggregate financing, the broadest gauge of new credit, fell to 1.36 trillion yuan ($200 billion) in April, according to data released by the People’s Bank of China Thursday. Shadow banking also began to shrink after a March expansion. That underscored weak borrowing demand as well as policymaker caution not to overdo the easing.
What Bloomberg’s Economists Say
“An unexpectedly large fallback in China’s April credit data raises fresh doubts about whether the economy has found a bottom. This reinforces our view that policy should remain supportive on both the broad based and targeted fronts.”
Chang Shu and David Qu, Bloomberg Economics in Hong Kong
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Policy makers have signaled their resolution to support sentiment. Hours after Trump’s tweets, the central bank decided to cut the amount of cash some banks must hold as reserves, and timed the announcement right before the market open. That’s after they skipped a much-anticipated reduction in the reserve ratio in April. The central bank’s policies have eased the strain on investors, with overnight interbank funding costs sliding to a three-year low.
On the fiscal front, a spending spree continued last month. The government has spent more than 9.8 trillion yuan and collected about 9.2 billion yuan in income in the first four months of 2019, according to Bloomberg calculations based on official data. Those include general spending and government fund expenditure such as infrastructure.
That spending pace, however, raises questions on how sustained the outlays could be. Tax revenue growth slowed to 4.6% in the first four months, roughly a third of the pace a year earlier.
The fiscal authorities also revealed a less rosy picture on the factory floor. Some companies stepped up purchasing in March to maximize the benefits of tax deductions effective April 1, the Ministry of Finance said in a statement. That theory, if true, could mean that the surge in March industrial output was transitory.
More data to be released Wednesday will reflect the health of China’s economy in April. Economists so far expect a slowdown in factory output and retail sales, while fixed-asset investment edged up from March.
“Significant policy efforts have been put to support growth and hedge escalation risk as China continues to negotiate with the US, and they are coming through,” Citigroup Inc. economists led by Yu Xiangrong wrote in a note “There seems no urgency to take more aggressive moves for now, but the PBOC may have to revert back to the easing bias if the additional US tariffs is to become effective soon.”
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