Thoughts on the recent macro trajectory and policy outlook
The investors have become increasingly concerned about the growth trajectory in 2H after the release of the 1Q activity & financial data, esp. considering rising external demand uncertainties. In this note, we re-cap the recent macro changes & share our roadmap of potential policy adjustments.
1Q macro data missed the market expectations in the following aspects –
March fiscal & financial statistics points to faster-than-expected withdrawal from policy support on both fronts.
March data for industrial production, investment, & PPI were weak.
Infrastructure investment growth deflated rapidly in 1Q2018.
Although there remains a few “bright spots” in 1Q macro data, investors fear that they may quickly “fade away” amidst faster-than-expected tightening of fiscal and monetary impulse, as well as rising external demand uncertainties. Investment & IP growth may “normalized” from April onwards as the weakness in March was partially driven by “later-LNY” effect, cold weather, & the impact of the longer than usual “Two Sessions”.
It is worth reiterating that overly-restrictive fiscal & monetary policy settings may serve against the longer term goal of “deleveraging”. Both fiscal & monetary policies have room to adjust & help “anchor the growth expectations” from a cyclical mgmt. point of view. The Politburo meeting held on Apr 23 pledged to conduct “accommodative” fiscal & “neutral” monetary policies, “anchor expectation”, and to lower financial cost.
There is more room to cut RRR, and/or to expand the loan quota given the pressure from NSA “standardization”.
Fiscal policy may increase transfer payment & work down reserves.
Over the medium term, more sustainable policies to “boost domestic demand” incl. reduction in tax & fees, promoting private mfg. investment, encouraging consumption, and improving social welfare. The latest Politburo meeting re-emphasized the importance of “boosting domestic demand”, first time in the past year. However, the policy makers will likely try to steer away from the “old pattern” of resorting to infrastructure & commercial property investment, and focus on more sustainable measures.
We will continue to monitor the fiscal & monetary policy impulse to gauge the change in actual policy execution & the consequent impact on growth. We maintain that sequential adjusted TSF growth & changes in real economy funding cost are the best leading indicators for cyclical demand. Although the “tone” of policy-makers has been adjusted recently, but the possibility remains for potential “lags” between detailed policy fine-tuning, policy execution, & activity growth.