"Leaks" of bad economic news suggest China is setting the stage for a new stimulus package
05/25/2012 1:47 pm EST
And that’s exactly my reaction to new yesterday that new bank lending in April and May has dropped to a degree that makes it unlikely that banks will meet the government’s target of 8.5 trillion yuan ($1.24 trillion) in new loans for 2012. At the recent pace the total is more likely to be 7 trillion for the year. Lending may be about 550 billion yuan in May, down from 682 billion yuan in April, the official Securities Daily reported today.
The drop in new bank loans would be just one more piece of negative economic news from China recently. For example, today the HSBC/Markit Economists purchase managers index fell to a preliminary 48.7 in May from a final 49.3 in April. Anything below 50 indicates that the economy is contracting. (This index has been consistently more negative than the official government purchasing managers index so what’s important here is the decline in the trend.)
But what interests me just as much as the numbers pointing to a slowdown in China’s economic growth in the first and now second quarters of 2012 is the timing of this “news.” All the reports on the May bank loan total have come from unnamed officials at China’s big banks or their regulators. Typically, sources like these don’t “leak” unless the leak has been authorized somewhere up the line.
I think it’s reasonable to assume that this news was leaked for a purpose.
I think the Chinese government is building a public case for some kind of economic stimulus package that goes beyond the steps that the People’s Bank has already taken (such as reducing the bank reserve ratio by 0.5 percentage points.) I don’t think the package will be as big as the post-Lehman crisis effort, but I think we’re looking at a set of measures big enough that the package might lead to criticism that China has over-reacted, that it is courting renewed inflation, that it is about to re-inflate a dangerous real estate bubble, etc. (For more on those fears and why a new package is likely to be smaller than the original, see my post http://jubakpicks.com/2012/05/22/china-has-seen-a-serious-economic-crisis-since-1998-1999-could-the-country-be-on-the-verge-of-another-one-now/ )
What might be in such a package? Certainly more reductions to the bank reserve ratio. Eased credit restrictions—there’s already been an announcement that the deeply indebted railway ministry will be allowed to borrow more. Increased dividend payouts from China’s state-owned companies that trade on China’s Shanghai A-share market. (Which considering that some of these companies aren’t profitable right now means that increased dividend payouts would essentially be a form of cash payment from the government to shareholders.) More subsidies to consumers, like the recent subsidy for the purchase of washing machines and other white goods. And finally another, but smaller, round of infrastructure projects. On May 23 the State Council promised to speed up existing railway, environmental protection, and rural projects, for example. The capstone to such as stimulus structure would be an interest rate cut by the People’s Bank.
The more “leaks” there are that make such a package seem like a necessity, the less criticism the government would face from overseas investors and economists.