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Strategies & Market Trends : The Financial Collapse of 2001 Unwinding -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (1725)	1/17/2019 1:33:09 AM
From: elmatador	Respond to of 13807

Get ready for China’s economic stimulus ELMAT: Xi desperate not to lose face abroad now must do somehting not to lose face at home Published on January 17, 2019 Gordon Orr Non Executive Board Member at Meituan-Dianping, Lenovo, Swire Pacific After squeezing private businesses in many ways through 2018 – with new intrusive regulations, by taking liquidity out of the economy and more – China’s government is altering course dramatically and fast. One critical short term fear being that many entrepreneurs will simply not re-open their businesses after the Chinese New Year shut down (as happened in 2009), leaving millions without jobs to return to. Another is the geopolitical risk that the US-China trade negotiations end without agreement and the US government raising tariffs further, leading to uncontrolled job losses and decline in consumer confidence and spending in China. Remember the economic context: Growth in consumer spending accounts for almost all of China’s GDP growth in recent years. Multiple actions to deliver a major stimulus to the economy have been announced and enough of them have been launched to make clear that a material stimulus to the economy will be delivered over the first half of 2019. Initiatives for businessFor businesses, this includes multiple levers starting with direction given to the banks to up their lending to SMEs (the core of employment). – Two-thirds of loans from smaller banks will go to SMEs. Banks, moreover, have been given permission to run higher bad debt ratios to enable them to step up their lending on top of the reduction in the lending reserve ratio that allowed them to increase lending by around US$120 billion. Many local governments are reducing the social tax contributions that employers should pay in order to allow them to pay Chinese New Year bonuses and in return for commitments to avoid layoffs. An across the board reduction in VAT has now been promised also. Local government infrastructure spending is being boosted by US$200 billion of bonds issued to support greater infrastructure spending in 2019. This comes alongside increased central government spending commitments of over US$100 billion on high speed rail and other transport infrastructure. Property companies are on a city-by-city basis being encouraged to utilize their land banks by relaxation of policies that had put a cap on the price at which they could sell their developments. And while there is always an injection of liquidity by the central bank in the run-up to the Chinese New Year, this year has seen a record amount of US$84 billion provided. Initiatives for consumersAnd for consumers, they are now receiving the income tax cut and a range of new tax deductions for spending on rent, education, and healthcare that can amount to as much as a one month increase in salary. Financing to support purchases of white goods are being rolled out and new subsidies for auto purchases have been promised. Some cities are relaxing their rules on what individuals have to demonstrate in order to buy a second or third property. While some of these actions could be pulled back if the US and China agree on a stabilization of the tariff situation, many (especially the consumer levers) are fully committed to. In which case these stimulation levers would come on top of a likely snap back in investment by manufacturers as delayed decisions are finally implemented. Would that result in a boom and then bubble as we saw in 2009, or in fact are things already so economically weak domestically in China that the stimulus is needed regardless of whether a tariff truce is agreed? Could levers be pulled back? Some levers, such as the income tax cuts and the issuance of infrastructure bonds, are already in flight and fully implemented. Others such as directed lending from banks, could be given new direction. But overall, once announced, it becomes very hard to pull back stimulative levers. The balance of mindset, despite all the statements on ensuring “quality growth,” will be to over-shoot on stimulus. Companies should be ready for this possibility. The geopolitical outcomes will be obvious to all but also pay attention to news on factory re-openings and re-hirings post Chinese New Year. We are likely to see stronger demand for infrastructure, business investment, and consumer spend in 2019 in China than we originally anticipated.