Latest China growth measures highlight gradual approach

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The latest moves by China to address slowing growth are gradual – not the big-bang, big-debt packages of the past. Additional local government bond issuance could push up yields but be offset by more investor inflows.

Commenting on the latest measures by the Chinese government to address the economic slowdown, Jean-Charles Sambor, BNP Paribas Asset Management’s deputy head of emerging market debt, said in a recent interview on CNBC that the actions reflect a “very gradual” approach to stimulus rather than the big-bang, debt-fuelled packages seen in earlier downturns.

Measures announced in the government’s annual Work Report include tax cuts and reductions in social security contributions and a 7.5% increase in infrastructure spending. More strikingly, the bond issuance quota for local governments will be increased by almost 60%.

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Latest China growth measures highlight gradual approach

Jean-Charles said China is not “going back to old-school (heavy) infrastructure spending”, running counter to market expectations of more large-scale fiscal and monetary stimulus. Instead, the focus is on “leverage at the local government level.”

A lingering concern would be that if the gradual approach did not work, there could still be a move to a more aggressive pro-growth package. “(That) could have a very significant fiscal impact.”

China bonds: A larger, more diverse bond investor base

More local government bond supply could put upwards pressure on yields, but this could be offset by more investor inflows into local markets.

It could also bring more inflows from foreign investors buying Chinese debt as China is included in more global bond indices. Chinese yuan-denominated government and policy bank securities are to be included in the Bloomberg Barclays Global Aggregate index over a 20-month period starting in April. Jean-Charles estimates this could result in inflows in the region of USD 200-250 billion.

He foresees a larger and more diversified domestic and foreign investor base for Chinese bonds. “In the long term, the picture is quite good,” he concludes at the end of the interview.

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