* Inflation will decline if the Global outlook remains unchanged
* Indebtedness could prevent a large Chinese stimulus programme
* Possibility of a smaller package centred on consumption and SMEs
Following the Lehman Brother's collapse China announced a two year infrastructure programme equivalent to 13% of its GDP. As global uncertainty continues Diamond Lee, manager of the Ignis Pacific Growth and International China funds, discusses whether China can again surprise the market with another stimulus package and what factors could affect this.
Inflation
"As inflation is often cited as a constraint to growth boosting measures, let's examine how quickly inflation will fall. In 2008, China had a similar inflation problem, which peaked at 9%. However, 12 months later, instead of having inflation, China saw 2% deflation. It seems that prices adjust quickly to growth, both on the way up and on the way down. In the short term, base effects means the next 2 CPI numbers will hang around at current levels, but if the state of the world remains as it is, I'd expect inflation to clearly decline thereafter. How steeply it falls will partly depend on monetary policy in the two biggest economies of the world. Arguably China is as guilty as the US in creating global inflation - since 2008 total loans in China increased by US$1.6tr."
Chinese debt
"This leads to what I think is the real constraint to another Chinese stimulus package, namely increase in indebtedness. While the Fed printed money for Quantitative Easing, China relied on loans to finance infrastructure programs. Total debt to GDP rose from 140% in 2008 to 180% by end of 2011, and another big splurge of credit will take it to 220%, compared to roughly 300% in US, UK, Japan and Europe. Although the level of indebtedness suggests there is some room to spare, we should also look at the pace of increase, and I would argue that it is highly irresponsible to increase total debt to GDP by 80% in a few years. There is room, however, for a smaller package."
Government
"This, at least, is the economic calculation, but ultimately politicians will decide. With a change of guards to occur within the next 12 months, it will be interesting to see whether the new leaders will make rational long term decisions, or will things like ego come into the equation, and are their power bases strong enough to resist calls for another stimulus program? Following a high profile crash on a high speed rail - a pet project in the last stimulus package - my sense is that appetite for government directed fixed asset investment has dwindled, while stimulus for consumption and SMEs is gathering support e.g. old-for-new deals to boost rural consumption, tax breaks for SMEs, more fiscal spend on education. However, these measures do not have as much of an impact on short term growth as fixed asset investment.
"So, in summary, I do not think there is room for another huge stimulus package as in 2008. Inflation is not the constraint but indebtedness has risen too much in a short space of time, and growth driven by fixed asset investment lost credibility after the high speed rail crash. However, there is room for a smaller package centred on consumption and SMEs, which do not have as much short term economic punch as fixed asset investment."
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