Speculation has been building in Beijing this week over the possibility of a mini-fiscal stimulus package, last mooted in mid-2012. At Friday’s cabinet meeting, Chinese premier Li Keqiang set out plans to inject Rmb1tr ($160bn) to renovate crumbling urban housing, and pump Rmb70bn into rural irrigation projects. Other plans include channeling capital into building new rural roads, and expanding the nation’s high speed rail network.
“These aren’t small investment numbers,” notes Liu Li-gang, chief China economist at ANZ in Hong Kong. “There’s a high probability that this stimulus package will be followed to the letter. So we should see growth pick up again after the first quarter.”
Leading mainland investment bank CICC this week cut its Chinese growth target in the first quarter to 7.3%, from 7.8%.
The main beneficiaries of China’s jerky, unco-ordinated pivot toward a more consumption-led investment model could well be Latin America’s commodity exporters. The Chinese government wants more consumption and less state investment, but that isn’t going to happen overnight, and mini stimulus packages may become a regular highlight of China’s growing pains.
“This process can help Latin America,” said Liu. “A renewed acceleration of China’s investment programme will boost its consumption of copper and iron ore, which could lead to a rebound in the price of both.”
That would benefit the big regional hard commodity exporters such as Brazil, Peru, Chile, and Bolivia.
China’s slowdown, said Wei Yao, China economist at Société Générale in Hong Kong, “is not over yet. Our expectation is that the deceleration will continue” through the second quarter. Last week’s Markit/HSBC purchasing managers’ index showed the manufacturing sector shrinking for the third straight month, shortening the odds on the government intervening to prop up its sluggish economy.
Yet opinions are divided on whether China will opt for fiscal or monetary stimulus measures – or a mixture of both. Andrew Polk, resident economist at The Conference Board’s China Center for Economics and Business, believes the Chinese government will “loosen the taps” but that “most of the stimulus will be trotted out on the monetary side”. Measures would likely include keeping interbank interest rates low, lowering reserve requirement ratios before the end of the second quarter and ordering state banks to lend to favoured projects.
“China doesn’t want to overstimulate the economy,” Polk adds.