The Chinese Ministry of Finance is trying to get local government to smooth out its spending patterns while the country is going through a controlled economic slowdown, Societe Generale’s China expert Yao Wei explained in a note. Spreading out some of the normally spiky Q4 growth will make it easier for state officials to maintain a bottom line 7 percent growth rate.
As the Chinese economy hits the state’s target of 7.5 percent growth, some people have been wondering what the lowest growth rate the government there will allow, and they finally have a clear answer. “The argument surrounding Beijing’s growth tolerance was settled by Premier Li Keqiang’s statement,” says Yei. “Seven percent is the bottom line, which certainly has helped calm the market sentiment.”
China vague on monetary stimulus
But this answer only brings up the next question, how will the government prevent growth from dropping below 7 percent when it has already said that a credit stimulus like the one used in 2009/2010 is off the table? The only answer being given, and apparently it’s been included verbatim in all sorts of official communiques, is “to better utilise the fiscal and monetary stock.” Of course, that leaves a lot of room for interpretation, and China is already trying to pull off a difficult maneuver.
“Beijing’s intention to strike the tricky balance between short-term growth stability and medium-term risk mitigation, requires significant improvement in capital allocation efficiency to work,” says Yei. “There is no quick magic, and so patience and tolerance is still required.”
Societe Generale recommends seasonal spending, starting now for China
Yei points out that one way to hit the growth target next quarter without affecting year-end targets is to persuade local government officials to spend money now instead of later. Spending is extremely seasonal, with more than a quarter of local spending coming in the last one or two months.
During the first three quarters, local government restricts spending to on-budget items, and then takes care of everything else in November and December. The Ministry of Finance is working to end this pattern by persuading local officials to frontload some of their spending, but it’s not clear that those officials are willing to listen. It also creates a problem that hitting Q4 targets this year will be more difficult, but it would make quarterly growth more stable going forward.