China Stimulus Plan Hits a Snag
05/14/2012 3:27 pm EST
Probably due to mostly unrelated political struggles in Beijing, the government isn't moving as fast as expected to pump up the economy, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
So far, the directional assumption seems to be right, but there are increasing questions about the pace.
The assumption is that the more China’s economy indicates that it is slowing, the more steps Beijing will take to stimulate the economy. The action this weekend indicates that’s still a reasonable assumption.
In data released Friday, the government reported that industrial output grew at an annual rate of just 9.3%. That was the slowest growth rate since April 2009. New bank lending for April, at $108 billion, came in almost 13% below projections and 30% below March levels. Money supply growth, measured by M2, was just 12.8%, when economists were looking for 13.3%.
In response to this data—and to the growth rate of China’s economy slipping to 8.1% in the first quarter of 2012 (the fifth consecutive drop in growth)—the People’s Bank cut bank reserve requirements this weekend by another 0.5 percentage points, to 20%, effective May 18.
It was the third reduction in reserve requirements in six months, but the first since the People’s Bank moved in February. (A reduction in the reserve ratio of this dimension frees up about $65 billion on bank balance sheets for lending.)
But the pace of government moves to stimulate the economy is slower than most, myself included, had expected. After moving aggressively in February, the People’s Bank had been quiet until this weekend’s action. It spent March and April on the sidelines as the economy continued to slow.
One increasingly popular explanation is that the hesitancy on economic policy has been a result of continued turmoil among China’s leadership after the ouster of Chongqing party chief Bo Xilai. That power struggle seems to have claimed another casualty with the sidelining of Zhou Yongkang, China’s chief of domestic security and a Bo supporter on the nine-man standing committee of the Politburo that essentially runs China.
The theory is that without clear direction from the top, China’s traditionally cautious bureaucrats are reluctant to take any initiative. And that may be why the People’s Bank, a relatively independent body, has been the first to add more stimulus to the economy.
Whatever the reason, a number of banks and economists have moved their estimates for when growth in China’s economy will bottom, from the second quarter of 2012 to the third quarter.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of December. For a full list of the stocks in the fund as of the end of December, see the fund’s portfolio here.