Don't expect a Beijing stimulus package

All signs are pointing to a disappointing first quarter for the Chinese economy. Banks, funds and think tanks both in and outside of China are downgrading their forecasts for economic growth, including the Chinese Academy of Social Sciences, Beijing’s key brain trust.

The academy thinks the growth rate for 2014 will dip below the official target of 7.5 per cent. UBS China economist Wang Tao expects first quarter real GDP growth to soften from 7.7 per cent in the last quarter of 2013 to 7.4 per cent.

Weak PMI data has also added anxiety to an already nervous market. This has sparked speculation that Beijing will unveil a stimulus package to boost growth. Media reports have seized on announcements from the state council -- the Chinese cabinet -- to speed up railway investment in the Western region as evidence of Beijing’s willingness to unleash a stimulus package.

I’m sorry to disappoint, but the Chinese government is not about to inject a large dose of stimulus into the system just to maintain the 7.5 per cent growth rate. Beijing has repeatedly emphasised that it is moving away from its previous fixation on GDP growth. It seems some analysts are still stuck in the mindset that Beijing will do whatever it takes to maintain its own growth target.

Stephen Roach, former chairman of Morgan Stanley Asia, asked the Chinese Finance Minister Lou Jiwei whether China should abandon its growth target. Lou said, "the government now stresses three macroeconomic goals -- job creation, price stability and GDP growth" and "it’s moving away from its once single-minded emphasis on growth targeting."

Roach, who teaches at Yale University, says "unlike most Western observers, who are fixated on the slightest deviation from the official growth target, Chinese officials are actually far more open-minded. They care less about GDP growth per se and more about the labour content of the gains in output."

Li Yang, the deputy head of the Chinese Academy of Social Sciences, a leading government think tank, also made it clear that the government would not introduce new stimulus measures until red lines such as unemployment figures, inflation and GDP growth were crossed.

"The government has announced its bottom lines. Everyone can stop guessing what the government will do. There will be no policy changes until red lines such as unemployment, inflation and GDP growth are crossed," he reportedly said at a recent steel industry conference in Beijing.

The Chinese government has emphasised a "comfort zone" for the economy. Its upper limit has inflation levels at 3.5 per cent and its lower limits have GDP growth at around about 7.5 per cent and a labour market robust enough to absorb 10 million new entrants into the urban labour market.

Of the three key indices, GDP is perhaps the most flexible, and it is closely linked with the unemployment level, which is arguably the most watched and important figure for Beijing. Until we see a noticeable deterioration in the labour market, the Chinese government will not implement fiscal measures to boost growth.

When you look at the announcement on railway spending measures more carefully, Beijing is actually inviting the private sector to take part in building this key infrastructure.

The Chinese government wants to establish a railway infrastructure investment fund, which would include both public and private sector contributions that could invest between 200 and 300 billion yuan a year. This year’s 150 billion yuan railway bond will also offer favourable tax treatments to investors. It also wants to get financial institutions like funds to invest in railways.

It shows that the Chinese clearly want to depart from their usual method of directly injecting money into shovel-ready projects when the economy stalls. It wants to lure the private sector into previously off-limit areas like the railways to boost investment without taking on more debt as it tries desperately to deleverage.

The Ministry of Finance is also promoting Public-Private Partnership (PPP) to provinces and cities. The move is designed to take the pressure off some heavily indebted local governments while maintaining growth momentum.

Another element of the hyped stimulus measure is not actually through increased spending but more aggressive tax cuts to small and medium enterprises. The State Council thinks small businesses will play a key role in absorbing new entrants into the labour market.

The tax rate for small businesses is only 50 per cent of the company tax and Beijing is also considering lifting the tax exemption threshold. So this round of policy measures will be nothing like the massive stimulus package of 2008 when the  Chinese government splurged $600 billion in infrastructure spending.