In the aftermath of all the recent dataflow, we still see more targeted stimulus ahead. It is worth bearing in mind that fiscal spending picked up in May and this is going to continue as will the focus on infrastructure spending.
The overall fixed asset investment slowed markedly in May, to 7.4 percent y/y, with fixed asset investment up 9.6 percent y/y in January-May, after it increased by 10.5 percent y/y in January-April and the slowdown was particularly sharp in the private sector, up just 3.9 percent y/y in January-May after 5.2 percent y/y in January-April, investment in public facilities picked up, increasing by 29.4 percent y/y in January-May after 28.3 percent y/y in January-April.
And last week the NDRC revealed that the government approved fixed-asset investment projects worth 78 billion yuan in May, mainly in water conservation, transportation and high-tech goods and the authorities intend to lower market entry thresholds for private businesses. Therefore, fiscal stimulus is still very much on the agenda.
Last week the finance ministry reported that fiscal spending was up 17.6 percent y/y in May after an increase of 4.5 percent y/y in April and it is now running well ahead of the government’s 6.7 percent targeted increase this year. And finance minister Lou has made it clear that the planned increase in the budget deficit (to 3 percent of GDP this year but probably higher in reality) is needed to support the economy and the government will carry on raising spending on big infrastructure projects.
At the same time, we are still not looking for any major structural reform and not just because of inevitable output costs, which would further jeopardise the overall goal of ‘social harmony’ as the labour market is softening.
Although president Xi Jinping recently repeated the message that supply-side structural changes were important and has urged companies to lower excess inventory and overcapacity, calling for short-term stimulus to be delivered in tandem with measures designed to meet the government’s structural reform goals, we are not expecting much from the latter.
We foresee that structural reform would be subordinated to the needs of countercyclical policy so as to deliver GDP growth of at least 6.5 percent (on the official data, which we do not put much store in) and it is now the accepted view in policy circles that growth will be L-shaped, not V-or even U-shaped.
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