2014-05-30

One More Time: No Stimulus

The Chinese leadership has been extremely consistent in saying there will be no stimulus. I can understand if investors think there will be a stimulus once there are obviously problems in the economy, but the leadership has said it will not repeat 2008.

If there is a crisis in 2014 or 2015, it will be worse than 2008 because by nearly every measure (except the stock market) is at an elevated level: more debt, more real estate supply, higher home prices, greater inventory, etc. If the government is saying it won't repeat 2008, then I take them at their word and assume they will not launch a massive stimulus program to save the economy until it is too late, and even then, they may decide it is too late and decide instead to see a real recession through to the end.

In the People's Daily Overseas Edition, the point about no stimulus was driven home yet again and it specifically addresses the investment banks that are saying China will cut the reserve requirement ratio (RRR) or make other adjustments to aid the economy. Short of banging them on the head with the latest 5-year plan, I'm not sure what else it will take for people to get the message.

Here is a part of the piece below:
On the "RRR" cut, experts and institutions are cautious. Minsheng Securities research report said: "It is undeniable, according to traditional Keynesian macro-control mode to deal with the economic downturn, the central bank should reduce the deposit reserve ratio at this time to pull up aggregate demand. But we have repeatedly pointed out, under the new normal, the framework of the government's macro-management thinking has undergone major changes. The odds of taking the old road, of a total stimulus policy is not high. "

They go on to say that the slowdown is structural, not cyclical. In other words, the slowdown is a result of the rebalancing. China's leaders clearly do not want to screw up their reform efforts by hitting reset and reinflating up the sectors that need to shrink relative to the overall economy. They would like to avoid a full blown recession in which these sectors decline rapidly, but if their goal is ultimately reform, I don't expect they will do much of any rescue effort directed at sectors such as steel, cement or real estate, if any type of rescue at all even arrives in time. Most likely, the economy will tip into a major slowdown, with a full blown recession still a possibility.

经济不会重演“花钱买速度” (Economy Will Not Spend Money to Buy Speed Again)
The face of the economic downturn, the market calls for drainage monetary stimulus voice was underway, a number of investment banks in a timely manner to determine the central bank will lower the deposit reserve ratio. Premier Li Keqiang recently said that the face of downward pressure, we insist on maintaining stability, promising initiative, co-ordination to promote steady growth, promoting reform, structural adjustment, improve people continue to implement the proactive fiscal policy and prudent monetary policy, strengthening policy synergies, good policy reserves, appropriate and timely pre-tune fine-tuning. Experts believe that China's prudent monetary will continues, the past policy easing, "buying economic growth," the old play will not re-staged.

Agency predicts "RRR"

Economic slowdown, real estate prices fell, difficulties in financing the real economy, the risk of local debt, overcapacity, foreign trade China's current economic weakness ...... there is an urgent need to solve a lot of problems. Minsheng Securities described in the report, said China's economic growth rate is in the shift period, the throes of a critical period of structural adjustment policies and pre-digested superposition of three, from the rapid growth of high-speed economic growth to the shift is inevitable. From the supply side, the demographic dividend recession, the savings rate inflection point, the potential growth rate of decline, the loss of comparative advantage in labor. From the demand side, the internal demographic turning point leading to the real estate engine stall, outside the dividends of globalization recession, global economic imbalances to rebalance from leading external demand and foreign engine stall.

In the eyes of many, when the economy is weak, you need a more relaxed monetary policy stimulus, lower the deposit reserve ratio is a high probability event. Zhu Haibin, China economist at JP Morgan in 2014 there will be two RRR cut, by 50 basis points each, one in the third quarter, and again in the fourth quarter.

Standard Chartered Bank report said lower the deposit reserve ratio is ripe, it is necessary to relax the policy to a greater range of steady growth.

"The central bank is currently dealing with a hard landing RRR best macroeconomic policy," Chen Jianguang, chief economist at Mizuho Securities in its micro-Bo, said Prime Minister Lee visits mentioned in Chifeng City, "downward pressure on the economy can not be taken lightly, timely pre-tune fine-tuning to keep money and credit growth. " Earlier SCIO situation briefing, Zhu Baoliang, director of the Information Center forecast also considers appropriate RRR is also an option. Chen Jianguang that "RRR is not a massive stimulus, but tight monetary policy to neutral from an inevitable requirement."

Steady tone will not change

On the "RRR" cut, experts and institutions are cautious. Minsheng Securities research report said: "It is undeniable, according to traditional Keynesian macro-control mode to deal with the economic downturn, the central bank should reduce the deposit reserve ratio at this time to pull up aggregate demand. But we have repeatedly pointed out, under the new normal, the framework of the government's macro-management thinking has undergone major changes. The odds of taking the old road, of a total stimulus policy is not high. "

Executives repeatedly stressed that the implementation of prudent monetary policy, industry analysis, in this process of monetary policy on the one hand to maintain concentration, to maintain the stability of the total, on the other hand directional tuning, promote structural optimization, in order to upgrade the economic transformation services. Neither expected future monetary policy tightening will not relax.

"Monetary policy can not be significantly relaxed, because the potential growth of China's economy continued downward, is a structural trend, not a cyclical output gap, blind loose monetary easily lead to inflation, increasing the difficulty of economic restructuring; monetary policy should not be closed tight, because the process of economic restructuring, the traditional industry, there is downward pressure, but the new economic growth point has not yet formed a large-scale, policy should be highly concerned about the economy in this period of potential risks, the Chinese economy to avoid 'hard landing'. " Minsheng Securities report said.

RRR is not a panacea, the central bank has more means to promote economic growth. National Australia Bank chief economist Optek Lim believes that if you just take the number of loose monetary policy, China's economy is expected there will be risks. The Chinese government is more likely to take the package, rather than a single monetary policy to ensure stable economic growth, while avoiding the economic ups and downs.

Innovation is more important than "money"

Compared with the blind pursuit of economic growth, and tap China's economic growth endogenous motivation, stimulate innovation and vitality, improve the quality of economic growth is more important in the current. Premier Li Keqiang said that China's economy continued under good this game, to upgrade is the direction, which requires the continuous deepening of reform and inspire the whole social innovation power, creative potential, entrepreneurial vigor.

Minsheng Securities reports that address the structural problems must rely more on the future, "Kaiqu diversion" type of supply management, to create a stable monetary and financial environment for economic restructuring and transformation and upgrading, integrating reforms in macro-control among the monetary policy and deepening reform closely together. Its core is not massive stimulus through a simple, but by improving the supply of capital, labor, production, systems and technology factors of production, activation economy itself hematopoietic function, enhance the potential growth rate of the economy.

"In the past thirty years, the rapid development of China's economy mainly depends on large-scale investment in human capital and only 30% of economic growth based on innovation and productivity improvement. If you want long-term development of China's economy, we must increase innovation in economic development role. "Dean said Yasheng Huang, MIT Sloan School of Management.

Yasheng Huang suggested that the current, critical to enhance China's scientific and technological innovation, is to change the government-led model of innovation, technological innovation and encouraging private entrepreneurship.

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