Are the Chinese Considering Accelerated Stimulus?

According to the most recent HSBC Flash manufacturing PMI report, China's economy slowed further in the month of March. Normally, weaker economic activity in the world's second largest economy hurts risk appetite and drives the Australian dollar lower but today, not only is AUD the best performing currency but U.S. stocks opened the North American trading session in positive territory. Stocks are struggling to hold onto their gains but a softer U.S. manufacturing PMI report caused the turnaround. When the report was initially released on Sunday, Australia's currency weakened but rampant speculation that China could respond with accelerated stimulus quickly reversed the move.

Although the People's Bank of China knew their economy would slow this year, the pace is quicker than anticipated. When combined with recent defaults, slower income growth and the modest recovery abroad, the central bank has a lot to be concerned about. According to the HSBC report, manufacturing activity contracted at its fastest pace since September 2012. By widening their trading band and allowing the Chinese Yuan to fall to its lowest level in a year, the Chinese government is already taking steps to support their economy and they are prepared to do more. Just last week, China's State Council pledged to "quickly push out already-decided measures to expand domestic demand and stabilize growth." These steps will include "construction on major investment projects" such as affordable housing, infrastructure (railway projects) and energy along with loosening access to private sector investment. They will also "quickly spend funds allocated in the budget."

We think the Chinese government has made it quite clear that they are considering accelerating fiscal stimulus but we do not expect any fresh monetary stimulus in the near term. The PBoC may allow the Yuan to weaken further, which would provide relief to exporters and keep rates low but that's the extent of monetary adjustments. What is good for China is good for the rest of the world. If the Chinese government were to officially announce an earlier rollout of these stimulus measures, not only would it promote further gains in currencies of countries reliant on Chinese demand like the Australian dollar but it would also boost risk, allowing for a stronger rise in global equities.