The measures, announced late Wednesday by the State Council (Chinese cabinet), will offer some small businesses a tax cut (while extending cuts for others), while the China Development Bank will help boost funding to create more low-income housing to replace shantytowns in some urban areas. The stimulus also makes changes to smooth further investment in the railways, a sector previously plagued by a major corruption scandal.
These measures show that Premier Li’s government aims to stabilize short-term growth with policies which can enhance efficiency while avoiding future financial troubles.They see the plan as a reaction to the drop-off in consumption by the wealthy, who have curtailed spending in the face of an aggressive anti-corruption campaign, and believe “markets will overall welcome” the moves.
On the other hand, Lu and Sheng don’t see any major stimulus push ahead like what was seen in the aftermath of the 2008 global financial meltdown, but they add that government will do enough to keep things stable.
“To be sure, we don’t expect Beijing to initiate another big stimulus, but some measures to fill the slack generated by demand shocks are necessary for financial, economic and social stability.
The Merrill Lynch economists reiterate their forecast for 7.2% growth this year (missing the government’s target of “about 7.5%”), but also “believe the chance for China to be hit by a nationwide financial collapse is extremely small, and we think the market is overly bearish on China.”
But while Merrill Lynch sees this as a one-off move just meant to keep the economy away from a hard landing, HSBC economists Hongbin Qu and Junwei Sun believe this is only the beginning.
“This may be a start of a slew of fine-turning measures. We think Beijing still has other options in their toolkit, such as the lowering of the entry barriers in various sectors, spending or incentives for environmental protection, as well as more urban infrastructure (such as subway), if needed,” they write in a note out Thursday.
They say the “modest” size of the stimulus “should buy time to implement reform measures, which could involve some short-term pain.”
And speaking of reform, Qu and Sun see a reformist agenda, as the State Council’s plan includes changing the way they fund railroad investment and the construction of low-income housing to replace shantytowns.
“The financing reforms for railway and shantytown reconstruction should help establish a long-term sustainable funding channel for these much-needed infrastructure projects, [and] it should help keep infrastructure investment (now at around 18.5%) at a steady pace,” the HSBC economists write.
That said, HSBC is keeping its 2014 China growth forecast at 7.4%.