Beijing's stimulus steps so far: what do they mean for growth prospects?

There are two major economic factors to keep your eye on this year: Beijing's monetary and fiscal stimulative policies, and the property market.  I will make a few comments on Beijing's policies here, and discuss property later.

There has been a constant flow of news about the PBOC trying to stimulate growth, and the central government's plans to step up fiscal spending.  As I wrote in a prior blog entry, lending facilities are intended to minimize rate volatility and liquidity disruptions, so I will not estimate their effect on stimulating growth.  Lowering benchmark rates are much less effective than they once were, because technically they have not been mandated lower and more rate liberalization steps this year will make the effects uncertain.  Benchmark rate cuts will probably have some effect on growth, but I will not try to estimate that effect, because I think it will be very modest.  Mortgage down payments have been lowered, but until the demand for housing improves, I will not estimate the effects of mortgages.

The two most important interventions out of Beijing are the RRR cuts (See PBOC tools infographic for details) which should free-up money for lending, and the increase in fiscal spending which should increase underlying demand.

The PBOC has cut the RRR twice this year.  We are assuming that the PBOC does one more reserve cut this year, probably in the Fall.  

How much will Beijing’s measures boost growth?

PBOC’s broad easing measures so far this year (not including activity meant to stabilize interest rates and benchmark rate cuts) amounts to a 1.3% expansion of credit if fully utilized, not accounting for a multiplier effect.  I estimate that this credit expansion would result in a contribution of 0.3% to real GDP growth, if historic relationships hold.

Beijing announced an expansion of the budget deficit to 2.3% from 1.8% in 2014. The central government's budget expansion would mathematically amount to another 0.5% if fully utilized, not accounting for multiplier effects.

What pace would we estimate ex-intervention growth?

Assuming underlying growth maintains its deceleration trend (I estimate ex-intervention slowing of .25% per quarter) and without intervention slows to 6.25% by Q4, that would point to 6.6% growth in 2015.

A very simple rough estimate of stimulus boosting by Beijing:

6.6 + 0.5 + 0.3 = 7.4%

This is not to say that 2015 will see growth of 7.4%.  Last year the central government underspent its budget target, so we may not see the full fiscal expansion.  And, over time the effectiveness of credit growth on broad activity has declined, so historic relationships may not hold.  But, my point here is that growth can run over 7% this year, even if the existing stimulus is half as effective as in the past.  Given that consensus is 7% for 2015, I think that there is a good chance that forecasters are underestimating the stimulus measures, and the balance of risk falls on an upside surprise by year’s end.  Also, as growth gets worse into the summer, we may see more downward revisions to growth forecasts, and consensus will fall further.  

Beijing's measures to boost growth will take time, and things will get worse before they get better.

When will we see things turn?

I have calculated that it takes roughly 4 months for PBOC boosted credit growth to translate into economic activity.  3 months after a credit increase you may see some signs, but 4 months seems to be when the bulk of credit growth spreads to the overall economy. That would imply a pickup from the first reserve cut starts stimulating growth this summer, with the second larger reserve cut boosting activity by the fall.  A third RRR cut, assuming it falls later in the year, will boost 2016 activity.