After a few months of insistence that macro policies will not be eased despite economic deceleration, over the last few days both Premier Li Keqiang and Vice Premier Zhang Gaoli sent signals that they are now concerned about the downside risk to the economy and "stabilizing growth" is important. While these messages remain very vague and unlikely to prelude any major monetary and fiscal relaxation in the short term, we believe that some low profile easing measures such as "expectation management", stabilizing the RMB exchange rate, accelerating approvals and implementation of infrastructure and environmental projects, granting more quota of bond issuance, relaxing lending restrictions on SMEs and exporters are possible.
In the past few days, a few members of the Political Bureau Standing Committee visited firms and local governments for "fact finding". On July 9, it was reported that Vice Premier Zhang Gaoli said in Sichuan that the government would "expand domestic demand" and "try every methods to provide funding to support SMEs, exporters, and technology firms". Yesterday, Premier Li Keqiang was quoted as saying in Guangxi that the government would "prevent economic growth from slipping below the lower bound". Although he did not define the "lower bound", we believe it means that 2013 annual GDP growth should not be below 7.5%, and thus H2 growth should not be below 7.3% (as H1 average is likely to be 7.6-7.7%).
As for specific policy actions to "stabilize growth", we believe that no consensus has been reached and next few weeks will likely be a policy consultation period. Our expectation is that, in the near term, the government will unlikely to resort to any major monetary and fiscal policy easing, partly because of the (somewhat misguided) belief that the overall monetary condition is still too loose, and partly because the fiscal budget cannot be changed without the NPC approval. Therefore, we believe that the government may resort to a number of modest, low profile measures such as:
1) Improving expectation management. This can be done by more frequently stating in the press the government's determination to ensure a stable economic growth, which hopefully can boost corporate and consumer confidence. At the same time, the government should avoid frequent reference to its willingness to "endure short-term pain", a message that has so far dampened market confidence and negatively affected investment in the real economy.
2) Stabilizing the RMB exchange rate. As we pointed out many times, the RMB has appreciated too quickly on a REER basis and negatively affected export growth. We believe that the PBOC will be instructed to keep the RMB more stable in H2.
3) Accelerating the approval and implementation of some capex projects, including railways, subways, public housing, water/air treatment, and new energies. These efforts will help speed up the circulation of funds already available to LGFVs and companies without requiring an expansion of monetary growth.
4) Granting more quota for bond issuance for infrastructure companies, increasing tolerance for NPLs of SME loans (e.g., by reducing the NPL coverage ratio for SME loans), and reducing excessive restrictions on domestic financing (both from banks and capital markets) for real estate developers via window guidance.
5) Accelerating the pace of export tax refunds and reducing transport charges.
As for actual economic performance, we expect a modest deceleration in economic activities in next 1-2 months, as it may take time for a consensus to be reached on policy easing measures, and it will also take time for such measures to show an impact. However, if these measures are indeed put in place in Q3, GDP growth should begin to recover in Q4.