Mizuho China Macro: A tale of two stimuli: Comparing the 2015 and 2008 packages

In Club News by Stephen Perry

Good day as we find we have a Conservative government again in the UK for the first time since 1997. Congratulations to Mr Cameron and may his Government continue their good work with China.
Following is an important analysis by Dr Shen, who has a sound grasp of the Chinese economy.
His comment on investment in the Silk roads very much echoes my view that China has been planning to develop infrastructure into the bordering nations.
This is designed to build common prosperity, peace and development. An admirable objective although into very sensitive areas. But if you leave these areas behind the basis for conflict increases.



A tale of two stimuli: Comparing the 2015 and 2008 packages (See Attachment Two stimulus 150508)

The 100bp cut to the RRR – only the second on record – clearly showed that the pace of China’s policy easing has accelerated. Going forward, a full list of easing tools is ready to launch. The question becomes: Will the 2015 stimulus be a replica of the 2008-09 version?

We believe that there are several similarities between the two packages: 1) the scale of this stimulus will be as large as the previous one; 2) infrastructure investment will feature prominently; 3) monetary policy easing will be aggressive; and 4) the consequences may be uncertain.

However, important differences in the packages include: 1) bank loans for financing the stimulus depend more on the stock market than on local government borrowing; 2) leveraging the government balance sheet by increasing central government debt, thus reducing the local government debt problem; 3) replacing domestic investment with investment in New Silk Road countries, particularly Pakistan and Indonesia; and 4) employment conditions being more resilient.

We believe the stimulus needs to be coupled with government reforms to increase spending efficiency and that stock market volatility may be a challenge. However, as the easing measures gain traction, China’s GDP growth should moderately accelerate to 7.1% YoY in 2Q15 and then be followed by additional government spending in 2H to take full-year GDP growth to 7.2% YoY. The question remains: What will happen after this stimulus?

Jianguang Shen
Mizuho Securities Asia Limited