Beijing is allowing the pendulum to swing towards reform success rather than growth
- The momentum has slowed more sharply than expected in recent months
- Beijing has come up with a ‘mini’ economic stimulus package
- Outlook should improve if growth picks up and inflation remains subdued
That China’s growth momentum has slowed more sharply than expected in recent months highlights one of the short-term risks of structural reform. Beijing has a broad arsenal of measures to boost growth, but for now it is allowing the pendulum to swing towards reform success rather than further strong growth for good reasons.
Beijing resolved to succeed in its reforms
So far the government has been paving the way for ‘economic surgery’ by:
- pursuing tighter monetary and fiscal policies to reduce excess liquidity and force the economy to deleverage
- cutting excessive investment and government spending
- liberalising interest rates
- expanding onshore capital market investment quotas for foreigners.
Nevertheless, the sharp slowing in growth suggests that Beijing might have underestimated the pains of structural change. To strike more of a balance between reform and growth, it has launched a ‘mini’ stimulus package to support sectors such as SMEs, social housing, energy and urban infrastructure. It is allowing qualified rural banks to boost credit and growth. It is unclear to us how effective this will be.
Further steps remain an option
The selective nature of the package reflects a desire not to spur overall investment excessively. If it is insufficient, Beijing can be expected to enlarge the range of measures, perhaps to include interest-rate cuts and broader reductions in banks’ reserve requirements.
While the odds of an economic hard landing currently look very low to us, such further policy easing might be just the recipe for a rebound in Chinese asset prices that the financial markets appear to seek. If growth momentum picks up and inflation remains subdued, China’s outlook should improve.