News | Question of the Week, WC 29th October
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Q: Does the recent stimulus from China mean back to business as usual?
A. This time around, for the main part we have seen more marginal shifts from the PBoC, while fiscal policy had tightened early in the year and has now become more expansionary again. As a result, we are starting to see a loosening of monetary conditions, the prerequisite of an upturn in GDP growth. The timing suggests growth will start to pick-up in the first half next year.
So far, though, we see nothing in the macro data to suggest the recovery will be particularly strong. What has changed in recent weeks is that the “national team”—in this case financial institutions railroaded into supporting equities—appears to have been spurred into action. We likely have the threat of a further equity down-spiral posed by outstanding pledged shares to thank for that.
This presents a downside risk for China. If the national team becomes a bit too aggressive in borrowing to prop up the equity market, the liquidity created could end up overstimulating the economy. Previously, that might have been read as a short-term bullish sign. But the current account was in deficit in the first half, and the Fed has no intention of halting its hiking cycle. China doesn’t want to find itself in the twin deficits camp in that environment. For now, that remains a downside risk, but we’ll be watching the money numbers very carefully in coming months.
Freya Beamish, Chief Asia Economist
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Posted: 1st Nov 2018
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