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Takeaway: China’s “stimulus” package really isn’t all that stimulating when analyzed in greater context.

SUMMARY BULLETS:

  • From our purview, there are a number of things that are worrisome with China’s recent economic stimulus announcement.
  • Among other constraints, the size and scope of the latest measures are hardly large enough to substantially reflate Chinese economic growth over the intermediate term.
  • Moreover, Chinese policymakers are unlikely to pursue any fiscal or monetary policies with enough firepower to meaningfully inflect the slope of Chinese growth over the intermediate term – absent a precipitous decline in global growth.

Overnight, China’s benchmark equity index, the Shanghai Composite, closed up a +3.7% – its largest day/day gain since JAN 17 on widespread reports that Beijing had fired the first rounds of its [pending] economic stimulus “bazooka”. The infrastructure investment initiatives, which were allegedly announced via the National Development and Reform Commission (though, suspiciously, nowhere to be found on their website) range from 25 light rail/subway projects valued at CNY800 billion ($126B) to 55 total infrastructure projects (some previously announced) valued at CNY1 trillion ($160B).

From our purview, there are a number of things that are worrisome with this announcement:

  • Explicit timelines for project implementation did not accompany the announcement(s) and various sources were quoted in financial media articles as suggesting the projects would range from 2H12-2018 to four years on average, per project.
  • While we certainly aren’t questioning the Chinese government’s ability to finance itself, it would be nice to see concrete plans for fundraising. While trending in the right direction in recent quarters (i.e. down), more local government financing is certainly not a positive as it relates to the health of the Chinese banking system, given the obvious risks associated with one of their main sources of income (i.e. land sales).
  • Since 2008, the Chinese economy has grown by +50.1% on a nominal basis to CNY47.2 trillion (full-year 2011), meaning that the high-end estimate of CNY1 trillion for the stimulus measures is approximately 2% of the total Chinese economy. Compared to the CNY4 trillion stimulus at the end of 2008, which was 12.7% of nominal GDP then, and also concentrated in two years (2009-10), the latest announcement is a far cry from anything dramatic enough to meaningfully reflate Chinese economic growth.

The latter point has long been our research view on China’s POLICY outlook, specifically in that Chinese policymakers are unlikely to pursue any fiscal or monetary policies with enough firepower to meaningfully inflect the slope of Chinese growth over the intermediate term – absent a precipitous decline in global growth. More importantly, we continue to hold this view in the face of a divergent consensus outlook for Chinese policy, as our predictive-tracking algorithms suggest A) the slope of Chinese economic growth appears to be leveling off, allowing policymakers to achieve their +7.5% real GDP growth target for 2012; and B) inflation is likely to accelerate in 2H12. Both severely depress the need and scope for introducing a major economic stimulus package over the intermediate term, which is what we think those who are bearish on the Chinese economy are most afraid of.

CHINA “STIMULATES” ITS ECONOMY - CHINA

For more details on why we initially arrived at the aforementioned conclusion, refer to the following research notes:

  • CHINA’S RATE CUT IS LIKELY A BAD SIGN OF WHAT LIES AHEAD (6/7): We don’t see the early innings of this Chinese rate cut cycle as a signal to get bullish on China’s economy or equity market at the current juncture. Moreover, we do not find it prudent for investors to increase their asset allocation exposure to commodities here.
  • CHINESE GROWTH: STICKING TO THE CENTRAL PLAN (7/13): We maintain conviction in our view that Chinese economic growth is not poised to meaningfully inflect over the intermediate term. Furthermore, we can’t stress how much the late-year transition in leadership or the growing official realization that the 2008-09 stimulus package and central plan (i.e. state-directed lending) contributed heavily to a rapid and potentially unhealthy expansion in credit (+96.6% since the end of 2008) may slow Chinese policymakers’ fiscal/regulatory response [if any] to an incremental deterioration in economic growth. Remember, Chinese banks have yet to see a material deterioration in credit quality (the industry-wide NPL ratio is at a measly 0.9%), so it’s not unreasonable to believe that Chinese policymakers could be saving their “bullets” for a potentially more worthy cause than a purposefully-engineered slowdown in Real GDP growth to +10bps above their official 2012 “target” of +7.5% (announced in MAR).
  • PONDERING CHINESE GROWTH PART II (7/17): Contrary to consensus speculation, we are of the view that Chinese policymakers are likely not readying a stimulus package to be announced and administered over the intermediate term that would be substantial enough to meaningfully inflect the slope of Chinese economic growth. As such, it would be prudent to fade any incremental Chinese stimulus rallies for the time being.

In summary, it does not appear to us as Beijing is willing to unleash the “bazooka” at the current juncture, as this latest announcement is somewhere between “stimulus-light” and “business as usual” for China’s state-run economy. The timing of the ECB announcement yesterday and the FOMC decision next week probably provided a fair amount of cover for sell-siders to perpetuate the NDRC’s announcement as part of their “globally coordinated easing” storytelling. In reality, however, the package really isn’t all that stimulating when analyzed in greater context. For now at least, Chinese stocks agree with our fundamental conclusions:

CHINA “STIMULATES” ITS ECONOMY - 2

Have a great weekend,

Darius Dale

Senior Analyst