Allan von Mehren
Danske Bank A/S
According to Chinese media, China’s State Council yesterday decided on a couple of small steps to support economic growth.
Setting up a fund of up to CNY60bn (0.1% of GDP) to encourage the growth of small and micro-businesses.
Measures that lower the initial capital requirement for fixed-asset investment projects (mostly infrastructure). The aim is to lift investment growth.
The fund aims to ‘support small and micro-sized businesses in the initial stage as seed investment’. The government also aims to attract more private capital to boost small businesses as private investors in the fund will be given priority over government-backed investors in receiving dividends.
The steps follow comments from premier Li Keqiang over the weekend saying that ‘China will use more policy weapons to achieve its growth targets for the year’. He also stated that ‘it is necessary to provide more public goods and services and to encourage mass entrepreneurship and innovation to boost the growth momentum’.
Implications
It seems clear that we should not expect China to announce one big policy response but rather to announce small gradual steps separately. We expect more of these announcements in coming months. However, the measures tend to fly under the radar of market attention and give the sense that the policy response is weak. The above news hardly made it to Bloomberg or other news wires outside China.
It is a clear risk in the short term that China gets ‘behind the curve’ in terms of stabilising growth and the negative impact of the emerging markets turmoil hits harder than China expects. Positively, some of the measures China is taking also benefit the long-term growth potential illustrating the determination to focus on reforms aimed at continuing the move up the value chain. New measures are also likely to include steps to facilitate rebalancing towards more service sector driven growth. However, many of these measures work in the medium to long term and have a smaller impact on the very short-term picture.
For global risk markets, there is a risk the overall policy response from big economies is unlikely to be very forceful. The US response is likely to be a delay in the first hike (we expect December) but the bar for real easing is very high. In the euro area, we believe we need to see further deterioration (weaker data, lower inflation expectations) for the ECB to add stimulus. In China, the government moves very gradually, with no clear impression of a big policy response.
South Korea released export data yesterday that looked very weak on the headline. Annual growth in exports for August was down 14.7%. However, most of the explanation is that the data is measured in USD and the KRW has weakened substantially lately. When measured in KRW, there is actually no change in the trend. Nevertheless, we see a risk that emerging market production takes a hit from the recent turmoil and that we see some spillover in the short term to US and euro manufacturing as well.
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