CLSA Asia-Pacific Markets China Macro Strategist: SINOLOGY

VIEW FROM BEIJING
China's National Bureau of Statistics has this week posted on its website an interesting article asserting that while there are clear signs of a strong economic recovery, there are also enough challenges ahead to preclude an early withdrawal of accommodative monetary policy and fiscal stimulus. Those views were echoed by the central bank in a separate posting on its own website, and are consistent with our view that Beijing is very unlikely to prematurely withdraw its stimulus program. We expect Beijing to err on the side of over-stimulating.

Not strictly personal
The NBS article is posted as the personal view of one of its analysts, but its tone and content indicate to us that it represents the official perspective. Here are a few quotes from the article (with our informal translation):

'. . . based on economic indicators available for April and May, GDP growth for the second quarter will probably accelerate to near 8%, a clear sign of bottoming out.'
'. . . based on QoQ GDP estimates by the relevant authorities, GDP growth was 2%, 0.1% and 1.5% in 3Q08, 4Q08 and 1Q09 respectively, and with 2Q09 GDP expected to grow over 2%, the bottom of the current economic downturn should have been touched in 4Q08.'

' . . . daily power generation in China declined sharply from the high of 10.31bn kwh in July to 8.53bn kwh in October . . . and in the first half of June it has come close to 10bn kwh.' [Comment: this indicates that YoY power generation growth, which has been negative since October, will likely be positive in June.]

'. . . many sectors have lower capacity utilisation at present compared with 1H08. . . . The low utilisation in some sectors reflects not only the existence of excess capacity but also the fact of continuously weak demand. . . with excess capacity some sectors will face more difficulties, resulting in lower earnings.'

'All of the above means that weak demand remains a major problem for our economy, and in next stage we should keep carrying on positive fiscal and moderate monetary policies.'
The central bank, in its posting, said China's economy is in a 'critical' stage and the PBOC will maintain a 'moderately loose' monetary policy.

Premature withdrawal unlikely
These official comments are consistent with our view that Beijing is very unlikely to prematurely withdraw its stimulus program, both because the Chinese Communist Party is now the world's most liquid financial institution, and because it is in the Party's political interest to continue spending on public infrastructure and to continue an accommodative monetary policy. Party leaders must also be aware that cutting back too early caused relapses in the 1930s and in Japan in the late 90s. We expect Beijing to err on the side of over-stimulating.