Tag Archives: economic growth

China Just Revamped its Stimulus Playbook in a Bid to Boost Growth

Bloomberg, Aug 5, 2015

If you build it in Beijing, will the private sector come? If you build it in Beijing, will the private sector come?

More infrastructure spending—with a twist.

A boom in the financial sector—spurred by a parabolic rise in share turnover—helped China’s economy grow by 7 percent in the first half of 2015, according to official figures.

But the financial sector’s unsustainable contribution to growth means that Chinese policymakers need an additional segment to pick up the slack if they’re to continue meeting economic targets.

The avenue Beijing has chosen to build upon is a familiar one: infrastructure investment.

China embarked upon a massive infrastructure spending program from 2009 to 2012, which had the effects of “lifting economic growth in the short run but also creating a local government debt legacy that threatens financial stability even now,” according to Dong Tao, Credit Suisse’s chief regional economist for Asia (outside Japan).

Concerns about excess capacity in China might leave some questioning the merits of a further round of infrastructure investment, but HSBC chief China economist Hongbin Qu views this as a logical course of action on the part of Chinese policymakers.

“The combination of high borrowing cost, increased risk aversion amongst commercial banks, and delays in fiscal support saw Fixed Asset Investment (FAI) growth decelerating to a decade low of 11.4 percent year-on-year in June,” he has written. “In particular, infrastructure investment, the obvious counter-cyclical policy tool, grew only 19 percent year-on-year in the first half of 2015, compared with 23 percent in the first half of 2014, adding to sluggish manufacturing and property investment.”

To finance these and other recent initiatives, the People’s Bank of China injects liquidity into policy banks (China Development Bank, Agricultural Development Bank of China, and Export-Import Bank of China), which then take equity in, or lend to, infrastructure projects favored by the government. Bloomberg reports that policy banks will soon issue special bonds and invest the proceeds in infrastructure projects.

Credit Suisse observes that—in part to avoid exacerbating local governments’ debt burdens—China has revamped the policy loop that gives rise to these projects, effectively making it much more centralized than was the previous round of stimulus:

The PBoC creates liquidity to commercial banks, through cutting the reserve ratio/interest rates and selective easing. Banks buy policy banks’ special bonds. Policy banks lend out to infrastructure projects that Beijing intends to promote. To some extent, the policy banks are doing what the local investment vehicles (LGIV) were under the Wen Jiabao administration. In the RMB4tn stimulus launched in 2009, the central bank eased monetary policies and banks lent to the local government investment vehicles, which are linked to the local governments, but have a separate balance sheet.

Here’s what that the two “policy loops” look like in chart form:

The important distinctions are that these policy bank bonds have longer maturities—making them better aligned with infrastructure projects, unlike the shadow credit provided to local government investment vehicles—and that policy banks will fund initiatives primarily with equity, rather than debt.

“Given their quasi-sovereign status, policy bank bonds are likely to be of longer tenor and lower cost, hence well-suited to match the duration of the underlying projects,” wrote HSBC’s Hongbin. “As China’s near-term growth driver shifts towards infrastructure investment from export and manufacturing investment, this mode of financing (on top of municipal bonds) may become the new norm.”

Having policy banks take equity stakes in infrastructure is essential to getting these projects fully financed and off the ground.

“Banks usually require an equity base equivalent to 30 percent or more of the infrastructure investment before being willing to commit to any lending, but new infrastructure projects have trouble securing the equity base, as shadow banking (the primary fund source in the past) shrinks,” wrote Tao. “Policy banks’ funds injection in equity form helps to address this hurdle.”

Unlike the major round of infrastructure spending, this edition is far more “refrained,” according to Credit Suisse, both in size and its concentration in specific areas. Its design, according to Tao, reduces the potential for “crowding out” and the creation of more excess capacity.

“This is not a repeat of the 2009 stimulus, but targeted easing to specific areas that potentially could help growth,” he added. “Beijing does not seem interested in another outsized stimulus program that might deliver more harm to the economy than benefits in the long run.”

These spending plans, however, serve as a signal that Chinese policymakers are not so willing to submit to a “new norm” of lower growth.

Still, this particular stimulative approach may not pay large dividends, said Tao.

“Unlike the last round in 2009, the private sector has demonstrated little interest in investment this time, despite Beijing’s efforts,” he wrote. “Until Beijing can find a way to re-engage private investment, we suspect that the economy may not benefit as much, other than in areas directly boosted by government spending and lending.”


Trade Deficit Widens, Showing Effect of Strong U.S. Dollar

Bloomberg, Aug 5, 2015

The trade deficit in the U.S. widened in June as the strong dollar lifted imports and hobbled exports, representing a hurdle for economic growth.

The gap grew by 7.1 percent to $43.8 billion, the largest in three months, Commerce Department figures showed Wednesday in Washington. The median forecast in a Bloomberg survey of 67 economists called for a widening to $43 billion.

A firm dollar, which makes American goods relatively more expensive, and weak demand overseas are weighing on manufacturers and preventing the world’s largest economy from gaining momentum. At the same time, rising orders from U.S. customers, as evidenced by record imports from the European Union, are helping keep some trading partners afloat.

“Exports are still hurting from the combination of soft global growth and the stronger U.S. dollar,” said Richard Moody, chief economist at Regions Financial Corp. in Birmingham, Alabama, who correctly projected the shortfall. “Trade is going to continue to weigh on growth.”

Bloomberg survey estimates ranged from trade deficits of $40 billion to $46.7 billion.

The Commerce Department revised the May gap down to $40.9 billion from an initially reported $41.9 billion, which means the economy probably grew at a slightly faster pace in the second quarter than currently estimated.

The June reading was in line with an advance estimate issued last week, which was already incorporated into the gross domestic product figures.

July Employment

Another report Wednesday showed slower employment gains in July. Companies added 185,000 workers to payrolls during the month, the fewest since April, according to ADP Research Institute. Economists projected a 215,000 advance.

Exports were little changed at $188.6 billion compared with $188.7 billion in May. Growing foreign demand for jewelry and other consumer products was offset by a slump in sales of capital goods such as telecommunications and medical equipment.

Imports climbed 1.2 percent to $232.4 billion from $229.7 billion in the prior month as Americans bought more pharmaceuticals, oil, automobiles and cellular telephones.

Europe was among the beneficiaries of growing U.S. demand as imports from the region grew to a record, swelling the trade gap between the two areas to the biggest in comparable data back to 1992.

After eliminating the influence of prices, which generates the numbers used to calculate gross domestic product, the total trade deficit widened to $59.3 billion compared with $57.6 billion in May.

GDP Influence

The gap between exports and imports has hurt GDP this year, according to Commerce Department figures. It had little influence last quarter and subtracted 1.9 percentage points from growth in the first three months of the year, the most since 1985.

The strength in the dollar has made U.S. goods and services less attractive for overseas buyers. The greenback appreciated about 22 percent from June 2014 through Aug. 3 against a basket of major currencies.

Resilience in job growth should help maintain steady demand from U.S. consumers, lifting imports. Employers have added an average 208,300 positions a month this year compared with 259,700 in 2014 that was the best performance in 15 years. Economists surveyed by Bloomberg project 2015 will show a 220,000 average, according to a poll conducted July 2-8.

The economy probably added 225,000 to payrolls in July, according to estimates in the Bloomberg survey ahead of Friday’s Labor Department report.


China central bank official sees downward pressure on economy persisting

Reuters, Aug 2, 2015

Downward pressure on China’s economy will persist in the second half of the year as growth in infrastructure spending and exports is unlikely to pick up, a senior central bank official was quoted as saying.

Chinese companies are not optimistic about business prospects according to the central bank’s second-quarter survey,

Sheng Songcheng, the director of the statistics division of the People’s Bank of China (PBOC), was quoted as saying by the National Business Daily on Saturday.

Pressured by uneven domestic and export demand, cooling investment and factory overcapacity, China’s economic growth is expected to slow to around 7 percent this year, the lowest in a quarter of a century, from 7.4 percent in 2014.

A plunge in the country’s share markets since mid-June has added to worries about the economy, and reinforced expectations that policymakers will roll out more support measures in coming months to avert a sharper slowdown.

The PBOC has already cut interest rates four times since November and repeatedly loosened restrictions on bank lending in its most aggressive stimulus campaign since the global financial crisis.

Sheng warned about the risks of local government debt, saying that 2 trillion yuan ($322.08 billion) in bond swaps may not be able to fully cover maturing debt, according to the report.

Sheng said the PBOC needs to step up the monitoring of local government financing vehicles given the current downturn in property market and limited local government revenues.

Sheng also said he expected second-quarter net profit growth for banks to fall, adding that banks’ exposure to risk “has become clearer”.

But he said the real-estate market could rebound in the second half and provide support for the economy.

Sheng said he still expects economic growth this year of around 7 percent, an inflation target of around 1.5 percent and growth of M2 – a broad-based measure of money supply – of around 12 percent.

Economists at the central bank said in June they expected growth to pick up modestly in the next six months as previous policy easing measures start to take effect and the housing market stabilizes.

But other analysts say that view is unduly optimistic, pointing to huge inventories of unsold homes and high local government debt which is curbing their ability to spend on infrastructure projects.

Growth at China’s manufacturing companies unexpectedly stalled in July as demand at home and abroad weakened, an official survey showed on Saturday.


The Fed Is Closer to Hitting Its Inflation Target Than People Think

Bloomberg, Jul 27, 2015

A woman walks past the Marriner S. Eccles Federal Reserve building as it is reflected in a puddle of water in Washington, D.C.

Signs of wage growth mean the central bank is moving closer to an interest rate hike in September.

This week’s meeting of the Federal Open Market Committee is really about September.

Fed officials aren’t ready to raise rates on Wednesday, and they know it going into the meeting. It’s a foregone conclusion. September’s meeting, however, is not. Thus, this week’s meeting is really about gauging the likelihood of a September liftoff. And that likelihood will depend in large part on the Fed’s confidence in hitting its inflation target—which Fed officials may feel is much closer than many people think.

Last week, St. Louis Federal Reserve President James Bullard said the September meeting is effectively a coin toss. Market participants aren’t far behind.

Do other monetary policymakers believe sufficient progress has been made to put September in focus?

Turn to the Fed’s thinking on the first rate hike as described in the minutes of the June FOMC meeting:

In considering the Committee’s criteria for beginning policy normalization, all members but one indicated that they would need to see more evidence that economic growth was sufficiently strong and labor market conditions had firmed enough to return inflation to the Committee’s longer-run objective over the medium term.

Break that up into three parts—growth, labor, and inflation. On the first point, incoming data suggest activity held firm in the weeks following the June FOMC meeting. The Federal Reserve Bank of Atlanta’s GDPNow measure has been modestly gaining ground:

Note this range remains broadly consistent with the central tendency estimates of potential growth from the Fed’s Summary of Economic Projections. In other words, actual growth rebounded to—or perhaps even a bit above—potential growth. Policymakers will take comfort in these numbers as they confirm their suspicion that first-quarter weakness was largely much ado about nothing. In addition, authorities in Europe dialed back the tail-end risk from the Greek crisis, eliminating at least momentarily one impediment to hiking rates. China, however, still remains a wild card. On net, concerns over the growth outlook eased somewhat since the June meeting, increasing the Fed’s willingness to consider September.

Similarly, labor market data show steady underlying trends despite a first-quarter swoon, with job growth rebounding:

Meanwhile, measures of labor underutilization generally continued their slow yet steady improvement in June. Underlying growth, it seems, remains sufficiently strong to drive further improvement in the labor market.

But is the combination of the growth and employment outlook sufficient for FOMC members to be confident that inflation will return to target? If these numbers hold or improve for another six weeks, the answer will probably be yes by the time the September meeting rolls around.

Consider first that with both oil prices and the dollar stabilizing, the transitory impact on inflation fades:

Second, the Fed will point to other measures of inflation as evidence that its preferred measure, PCE inflation, will trend toward target over time. Notably, core CPI is tracking higher than core PCE:

Also, core PCE closed in on target on a three-month basis, providing substantial reason for policymakers to believe the deceleration of the latter part of 2015 has largely played itself out:

And note that Fed officials may believe they’re really not that far, if at all, from target in the first place.

The Federal Reserve Bank of San Francisco recently concluded:

Taking into account the volatility of monthly inflation rates, the recent departure of 12-month inflation from the 2% target rate does not appear particularly significant or permanent in comparison with earlier episodes. Moreover, since the early 1990s, the empirical Phillips curve relationship that links inflation to the deviations of production or employment from their longer-term trends appears roughly stable. Hence, continued improvements in production and employment relative to their long-run trends would be expected to put upward pressure on inflation.

Below target inflation? Where? Move along, folks, nothing to see here. Yet even if the inflation picture firms while the labor market continues to improve, it’s worth asking: Is that same labor market sufficiently tight to justify a rate hike? Policymakers need a reasonable level of confidence that full employment lurks around the bend. We’re getting closer, to be sure, but stubbornly persistent weak wage growth belies the conjecture that little slack remains.

Still, evidence mounts that the wage growth story is turning, a point highlighted by none other than Federal Reserve Chair Janet Yellen:

Finally, the pace of wage increases also may help shed some light on the degree of labor market slack, since wage movements historically have tended to respond to the degree of tightness in the labor market. Here too, however, the signal is not entirely clear, as other factors such as longer-run trends in productivity growth also generally influence the growth of compensation. Key measures of hourly labor compensation rose at an annual rate of only around 2 percent through most of the recovery. More recently, however, some tentative hints of a pickup in the pace of wage gains may indicate that the objective of full employment is coming closer into view.

More anecdotal evidence of an inflection point comes from the July Beige Book:

Wage pressures were modest across most areas of the country, outside of some specialized skill and high-demand occupations in sectors such as information technology, transportation, and construction. Reports from Kansas City and San Francisco were more robust, indicating intensifying wage pressure across a broader range of industries. Cleveland, Chicago, and San Francisco all highlighted a growing sense among business contacts that recent announcements of minimum wage hikes and pay increases at a number of large retailers could prompt broader wage pressure across other industries as firms compete to remain attractive employers.

Overall, I sense there is a growing confidence among policymakers that wage growth will soon accelerate. That confidence is likely sufficient enough to move the Fed closer to the first rate hike. Still, hard data is better than anecdotes. Solid evidence of accelerating wage growth in the next two labor reports would go a long way toward convincing FOMC members that they could safely move in September.

Would Yellen acquiesce to a September rate hike?

While she is viewed as supporting only a single hike in 2015, there’s no reason to believe that hike must come in December. Yellen has made two points abundantly clear with respect to policy normalization: She prefers “early and gradual” over “late and steep,” and she anticipates policy will not be on a preset path as it was in the last tightening cycle. As pointed out by Greg Ip, these preferences justify a September rate hike on a risk management basis. The risk of policy shifting to “late and steep” only increases as the economy approaches full employment. The Fed can address that risk by moving in September. But a hike in September does not guarantee a hike in December; the Fed could take a pass at that meeting. Hence, Yellen could move in September and, if justified by the data, deliver only one 25-basis-point rate hike in 2015, while at the same time throwing the Fed hawks a bone.

Bottom Line: At this week’s meeting, policymakers will be judging the distance to the first rate hike. I think they will make their way through an analysis similar to above and conclude that distance has certainly closed since the last FOMC meeting. Indeed, probably closed enough to put September firmly on the table. But will they lay down any markers? They’ll likely not add language that promises a hike in September; they want to conduct policy on a meeting-by-meeting basis. But be on the watch for any change in the statement that might point to an increasing confidence that the economy is on the right track. That would be a good signal that September is alive and well.


China’s Stock Market Value Tops $10 Trillion for First Time

Bloomberg, Jun 14, 2015

The value of Chinese stocks rose above $10 trillion for the first time, the latest milestone for the nation’s world-beating rally.

Companies with a primary listing in China are valued at $10.05 trillion, an increase of $6.7 trillion in 12 months, according to data compiled by Bloomberg. The gain alone is more than the $5 trillion size of Japan’s entire stock market. The U.S. is the biggest globally, at almost $25 trillion.

No other stock market has grown as much in dollar terms over a 12-month period, as Chinese individuals piled into the nation’s equities using borrowed funds to bet gains will continue. Valuations are now the highest in five years and margin debt has climbed to a record, all while the economy is mired in its weakest expansion since 1990.

“This a reflection of the risk-taking attitude of the public,” Hao Hong, the chief China strategist at Bocom International Holdings Co. in Hong Kong, said by phone on Sunday. “People are taking on an unreasonable amount of risk for deteriorating economic growth.”

Outside of China, investors aren’t showing the same enthusiasm toward the nation’s equities. Funds pulled a net $6.8 billion out of Chinese stock funds in the seven days through Wednesday, Barclays Plc. said in a research note, citing EPFR Global data. Dual-listed Chinese shares cost more than twice as much on average on mainland exchanges than they do in Hong Kong.

Stock Valuations

MSCI Inc.’s June 9 decision against including mainland equities in its benchmark gauge had little impact on the Shanghai Composite Index, which climbed 2.9 percent last week to its highest level since January 2008. Foreigners are limited by quotas when buying shares in Shanghai via an exchange link with Hong Kong, while similar access to Shenzhen-traded stocks will likely start this year, according to the Hong Kong bourse.

The Shanghai gauge has rallied 152 percent in the past 12 months, the most among global benchmark indexes tracked by Bloomberg, and trades at about 26 times reported earnings. Less than a year ago, the gauge was valued at about 9.6 times, the lowest since at least 1998. The Shenzhen Composite Index, tracking stocks on the smaller of China’s two exchanges, trades at 77 times profits after surging 194 percent.

Gains have been fueled by speculation the government will take more steps to boost growth. HSBC Holdings Plc predicts a 50-basis-point cut in lenders’ required reserves in the “coming weeks,” while Societe Generale AG said one more is needed before the end of June. That would be the third reduction this year.

Trading Accounts

While the latest data showed the economy stabilizing, indicators from retail sales to industrial output are still growing near the slowest pace in years and trade remains weak. Exports slumped in May and imports declined for a seventh month.

Profits in the Chinese gauge trailed analyst estimates by the most in six years in 2014 as economic growth slowed to 7.4 percent, the slowest pace in more than two decades.

Mainland investors’ fervor for stocks remains undaunted, with a record 4.4 million trading accounts opened in the final week of May, and margin debt on the Shanghai exchange rising to a record 1.44 trillion yuan ($232 billion) on June 11.