International | Aug 19 2009
By Chris Shaw
Recent economic growth data show the massive fiscal stimulus program instigated by the Chinese Government has provided a boost to the Chinese economy, especially in the six months to the end of the March quarter this year, but in the view of Standard Chartered there are now signs this boost is quickly fading.
This coincides with the Ministry of Finance dialing back on its monetary policy settings, making what it describes as a “moderate adjustment” without providing much detail on what this actually means. Given concerns it could mean something along the lines of increasing the deposit reserve requirement for banks or even an increase in interest rates, shares in China have sold off heavily in recent weeks.
The impact on growth of the Ministry’s decision to scale back its settings has been significant in Standard Chartered’s view, as on its numbers the fiscal stimulus measures equated to around five percentage points of nominal year-on-year growth in the first quarter, a number Standard Chartered estimates subsequently fell back to just 0.3 percentage points in the second quarter.
While the trend towards less stimulus is good from the point of view of easing concerns about any potential overheating, at the same time it raises concerns about the potential for a weakening in what remains a fragile economy. Standard Chartered’s view is reality will likely be somewhere in the middle, meaning while the rate of growth in the economy is now moderating, there is not a big chance of a major double dip in terms of the growth outlook.
In the group’s view, there will likely be some impact on activity levels as the stimulus fades, as spending on the likes of rural infrastructure, equipment buying by hospitals and the construction of schools and clinics will slow, especially as it relates to project starts. As well, any slowdown in infrastructure spending is likely to have a less than positive impact on asset prices in the group’s view, which could also feed through to a weaker growth outlook in coming periods.
A further problem for the Chinese economy, according to Standard Chartered, is the Chinese Government’s management style, as it is based on achieving certain targets. For example, Standard Chartered notes the Ministry of Finance has a target for revenue growth of 8.2% for this year and given the weaker global economic environment this is stopping it from bringing in measures such as tax cuts that would actually help the corporate sector.
This issue gets worse as you move down the line, the group pointing out many city and district governments are reportedly being asked to generate revenue growth of as much as 11% just so the Ministry can be assured of hitting its numbers.
This all means as the fiscal stimulus fades it will be increasingly difficult for companies in China to pick up the slack, which also suggests some concern over the growth outlook for the Chinese economy looks justified as the stimulus measures ease.