China May Roll Out Another Round Of Policy Easing As Meetings Signal Change Of Mood

Premier Li Keqiang led a State Council meeting and sent out a clear signal of another round of policy easing for the second time this year, says a research report by Gao Hua Economics Research.

The State Council meeting laid out a few initiatives, including accelerating major investment projects outlined in the 13th Five-Year Plan, further encouraging social capital to participate in projects, pushing for innovate financing channels, and rolling out more policy measures on utilizing foreign capital.

In addition, the State Council announced last week that inspection teams will be sent out to ensure projects are carried out on the ground on a timely basis.

These two events are important signals that the Chinese government intends to loosen cyclical policy for the second time this year, says the report.

After a round of aggressive easing at the start of the year, which significantly boosted activity growth but at the perceived expense of faster money and credit growth and higher inflation, the policy stance normalized from April.

The decision to step up policy support again now is likely the result of renewed weakness in activity growth, especially in fixed asset investment growth.

Contrary to many other policy announcements, these two events can make a significant difference in the near future as they can affect the two most important barriers to faster fixed asset investment growth: willingness and ability to invest.

The inspection teams sent out by the central government will force lower-level officials to carry out their duties.

The ability to invest is mainly a question of funding – project approvals have become much less important than before the current leadership took over in 2013, as the government made the approval process much easier.

The key focus of the funding is likely to be off budget quasi-fiscal supports via policy banks. This funding has the practical advantage that it doesn’t make the budget deficit appear to be too large, and is relatively easily controllable by the government.

As a result, fixed asset investment growth and broad economic activity growth are likely to show improvements in the coming months, though September monthly data may still be on the weak side.

Last year, cyclical policy was also loosened in September, and it was only in November that clear signs of a rebound in growth were shown.

China may also consider one or more bank reserve requirement ratio cuts, especially if the amount of forex outflows increases further. With the G20 Summit out of the way, currency depreciation and capital outflows are likely to resume, says the report.

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