China's Mini-Stimulus Unlikely To Make Much Difference

The Chinese government has announced measures to expedite approved rail projects while at the same time increasing the total length of new lines by 18% compared to 2013. The government also added supportive measures for small businesses by easing the qualifying criteria for tax rebates.

The announcement is in line with our expectations of small, targeted stimulus efforts. The government will likely need to introduce more such measures for the economy to achieve its real GDP growth target of 7.5% in 2014, and we would therefore not be surprised to see additional announcements over the coming weeks.

Such measures will likely look to prop up fixed-asset investment, whose growth fell to a nearly 12-year low of 17.9% year-on-year (y-o-y) in February. Meanwhile, Beijing will also be particularly sensitive towards any deterioration in labour-intensive industries, given the potential for a slowing economy to cause rising unemployment. In order to address these areas, some form of monetary stimulus is becoming increasingly likely, and a move to lower banks' reserve requirement ratios (RRR) may be in the offing in order to support credit creation. That said, we maintain that a 2008-2009-style 'big-bang' stimulus is not on the cards, as this would undermine President Xi Jinping's economic reform credentials.

While we cannot guarantee that the Chinese government will not respond to further economic weakness with increasingly aggressive stimulus measures, we strongly believe that any positive impact of such measures on near-term growth would be outweighed by the negative impact on the medium-term economic outlook. Past stimulus packages have been instrumental in exacerbating the unbalanced nature of China's economy, and we believe that they have created growth at the expense of sustainable wealth. The surge in property prices over recent years, which has supported economic growth by boosting construction spending, thereby supporting local government revenues, and generally keeping the huge credit boom rolling on, appears to be coming to an end. With this in mind, we maintain that the trend of weakening credit growth is only just beginning, and efforts to halt this will not bear fruit.