As China Delivers Official 2019 Growth Target, Here’s Some Context And Color

The annual National People’s Congress is underway and we now have the official announcement on China’s economic targets for 2019.

The GDP growth target for this year is 6%-6.5%. M2 will be in line with nominal GDP growth and you can expect a tax and fee cut of 2 trillion yuan versus an 800 billion yuan target a year ago.

China has set the 2019 budget deficit at 2.8% of GDP compared to 2.6% in 2018 and Beijing plans a 3ppt cut to the top VAT bracket.

Leverage will be kept “basically stable” in 2019, apparently. And that assumes you can ignore the irony in calling this “stable”:

(BNP)

This comes on the heels of a lackluster session on Wall Street, where sizable losses following more upbeat trade headlines and early news of the VAT cut failed to spark a rally in US shares ahead of key data stateside and mounting political tension inside the Beltway.

Worries about China’s economic trajectory have dominated the market narrative over the last six months as rapidly decelerating activity data underscored the notion that the Sino-US trade dispute was taking its toll at a time when the years-long deleveraging push was already taking some wind out of the sails.

The economy grew at the slowest annual pace in more than a quarter century in 2018. Growth in Q4 clocked in at the slowest pace since the crisis.

(Bloomberg)

Analysts and market participants have spent the last two months relentlessly parsing the data for signs of a bottom and on that score, the better-than-expected Caixin print (which offset a miss on the official PMI) offered some hope. Key data out later this week will presumably give everyone a chance to asses whether January’s blockbuster credit growth numbers presaged a pickup in the real economy.

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There are still pressing concerns about whether additional monetary stimulus will bump against the law of diminishing returns given obscene leverage and a lack of demand for credit at a time when uncertainty abounds.

The monetary policy transmission channel has become noticeably clogged, prompting some analysts to question the efficacy of RRR cuts and other PBoC maneuvers aimed at getting more credit flowing to the real economy. For her part, Barclays Jian Chang (the only analyst to nail the PBoC in 2014) last month suggested that a benchmark cut might be “unavoidable.”

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In her latest note, dated last week, she strikes a more constructive tone, noting that the “improved effectiveness of China’s policies and likely strong credit growth in Q1 support [a] more optimistic forecast of a Q2 rebound in growth.”

That said, she’s by no means convinced that China is out of the woods yet.

“Although risks have become more balanced than in late 2018, in our view, with a trade agreement appearing more likely, the more patient Fed, and improving policy efficacy, the Chinese economy still faces significant downward pressures arising from weak global demand, a housing downturn, and lurking PPI deflation”, she cautions, adding that the headwinds should prompt policymakers to “maintain an easing bias to offset a likely softening growth momentum in the second half of the year.”

She goes on to pick apart the record January credit surge and as usual, her analysis is concise, but also incisive. Here are three key points which together make for a solid argument in favor of the notion that the rebound in credit growth is unsustainable (and these are truncated):

First, we think the usual front-loading of loans in January likely was greater this year than last year, due to the decline in loan rates since Q4 and the expectation of further declines which drove banks to lend as early as possible. Second, we think the rebound in off-balance-sheet lending in January is likely unsustainable, given no meaningful relaxation around shadow credit regulations. Third, looking at the structure of lending, the increase in January loans was driven largely by growth in short-term loans and corporate bills (Figure 17), while long-term corporate loans remained broadly stable. The strong short-term corporate bill financing likely was driven in part by regulatory arbitrage, which has propelled the regulators to strengthen the inspection of the true use of bill financing. Excluding short-term loans and corporate bills, the rebound in TSF growth (+30bp) is more modest than headline TSF growth (+60bp).

When you combine the assumption that the pace of credit creation seen in January isn’t sustainable with the prospect that any trade deal with Trump will take time to boost actual economic activity (for instance, if tariffs aren’t lifted immediately, exporters may wait to ship) and then you throw in the slowdown in global growth, evident in all manner of indicators across major economies, you come away thinking that Beijing will be in easing mode for the foreseeable future, both on the monetary and fiscal fronts.

So, that’s some (hopefully useful) context for the targets and headlines from the NPC mentioned here at the outset.

For what it’s worth (and we include this just to give you some additional reference points for the numbers coming out of the NPC), below find Jian Chang’s expectations both for fiscal and monetary policy this year in light of persistent growth headwinds, a still-impaired transmission channel, concerns about credit demand and the prospect that a trade deal doesn’t quickly boost activity:

On fiscal policy we forecast the official budget deficit in 2019 will be increased to 2.8% of GDP from 2.6% in 2018, and the augmented fiscal deficit will be expanded to 11.1% of GDP from 10.3% in 2018. We expect the fiscal expansion to include tax and fee cuts of CNY1.6-1.8trn, and more off-budget spending, including increased local government special bond issuance.

On monetary policy, we maintain our forecast of 200-300bp of RRR cuts over the remainder of 2019 (with some of the liquidity released being used to repay borrowing from the Medium-Term Lending Facility), and two 25bp cuts to the benchmark lending interest rate, one in Q1 and another in Q2.