China: another dose of stimulus?

The HSBC-Markit manufacturing purchasing managers’ index, a widely watched Chinese data series, slid to an eight-month low in March. It has now been below 50 (indicating a shrinking manufacturing sector) for three months. Weak domestic demand was the main culprit.

The weak reading was especially disappointing, because activity in March usually bounces back from February’s Chinese New year celebrations. After several weeks of poor data, Nomura and Société Générale now expect annual GDP growth to ease to around 7% in the second quarter. The government has set a target of 7.5% for the full year.

What the commentators said

With growth looking set to miss the target, speculation over Beijing launching another stimulus has grown. HSBC’s Hongbin Qu expects measures to stimulate private investment and spending on public housing, while Nomura’s Zhiwei Zhang expects the authorities to resort to the usual means of bolstering GDP: stimulating lending.

They usually do this by lowering the reserve requirement ratio, the amount that banks have to keep in reserve rather than lend out.

But don’t count on a stimulus, said Capital Economics. The government is trying to wean the economy off its dependence on credit-fuelled investment, and will be reluctant to stimulate until there are signs of weakness in the labour market, their “primary concern”.

So far that is holding up fine. And the danger of another stimulus, as Alex Frangos pointed out in The Wall Street Journal, is not only that it will inflate the credit bubble of recent years further, potentially leading to an even nastier bust later, but that it’s also becoming less and less effective.

“Debt is like alcohol, in that the more often one drinks, the more servings it takes to get drunk.” Credit efficiency, or “the jolt” an economy gets per yuan of debt, has plunged since 2008, and many firms now borrow to repay old loans rather than creating new activity. China is reaching debt saturation point.

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