The unrealistic expectation of China’s potential fiscal stimulus22 May, 2012, 18:58. Posted by Zarathustra
Earlier today, we have already heard that the Chinese government is considering bringing investment projects forward in hope to offset the negative effect of slowing (and possibly contracting) fixed asset investments. We have heard this kind of thing before. Essentially, that was partly what the stimulus after the Lehman bust about, albeit at a much bigger size.
One can say a lot of things about that, from some vaguely bullish comments that this is going to avoid hard landing for sure to being a complete sceptic. Here, I will not be surprised to see some big fiscal packages if the economy deteriorates further. I will leave the analysis of the impact of that later, although I am currently leaning towards the opinion that perhaps the consensus has been too optimistic about the effectiveness on stimulating growth, not to mention the very high possibility that the stimulus will be geared towards fixed asset investment anyway (you can’t force people into eating more can you?), which will not be helpful at all as far as adjusting the economic structure is concerned.
The latest note from Nomura’s metal and mining team, which called the commodities super-cycle is over, is back with another piece of research, which is not enthusiastic at all on the prospect of some potentially massive fiscal stimulus.
Growth at what cost? We believe much of the current weakness in China’s property market is the direct impact of previous stimulus packages…..
The default view is China will ultimately be able to stimulate their way out of any potential downturn in growth, which by definition must see continued growth in construction activity and steel production. Perversely, the weaker the data, the bigger the expected stimulus package would be. While we agree with the view that stimulus can stop a complete collapse, we remain much more concerned than peers that the “success” of previous stimulus packages will cannibalise the ability of new stimulus packages to create year-over-year growth in construction activity and steel production.
The impact of the social housing program that was a source of construction growth in 2011 is a great reminder of the potential difficulties that come with a growth model based on perpetually increasing construction. Construction activity related to social housing is now part of the “base” level of demand; to generate year-over-year growth will require more “social” houses to be built in 2012 than in 2011. At a minimum China must now build the same number of social houses in 2012 just to stop a year-on-year fall in construction activity – in this way we view social housing as a demand head wind, rather than a demand tail wind.
While more stimulus is possible – will it be effective in 2012?
Stimulus has been a benefit to China’s economy for 2009-2011 in the form of higher GDP growth. The potential second order consequence of FAI growing at 25-30%pa (2-3x GDP) is the significant spike in projects under construction in 2009-2011 becomes a spike in completed projects in 2012-13. If construction activity has significantly outpaced demand (we think it has using sales as a proxy) then the excess is likely to become inventory. The prospect of renewed stimulus is the obvious caveat; but it’s not clear to us that more stimulus will help given our view that a key cause of the underlying weakness is a problem of excess inventories caused by too much construction.
We believe announcements of fiscal stimulus (if any) may be met with unrealistic expectations about the ability of this stimulus to create incremental demand growth for industrial metals.