China’s activity data for August (industrial production, retail sales, fixed asset investment) will be released at 930pm ET tonight (Friday). In the meantime, below are thoughts on China’s August credit data (released overnight Thursday and Xi Jinping’s latest signals on stimulus.
The overall takeaway is that while China’s government continued a robust pace of bond issuance in August, it is taking a while to translate government borrowing into actual spending and support for the real economy. We expect Beijing to expand and intensify these efforts in September-November, with incremental fiscal stimulus temporarily stabilizing growth in Q4 (see our stimulus note from last week HERE for more details). The lift to activity from stimulus will be both transitory and modest in strength relative to downside pressures on growth from weak domestic demand, which we expect to persist in the August activity data coming out later tonight.
August credit data
China’s aggregate social financing in August was not as weak as in recent months, but the overall picture is still subdued. Private sector demand for credit remains anemic. While government borrowing continues to drive overall credit growth, an increase in fiscal saving in August illustrates that much of this borrowing has yet to translate into spending.
- August aggregate financing increased by 3,030 billion yuan (compared to 3,128 billion yuan in August 2023), only marginally stronger than the Bloomberg survey forecast (3,017 billion yuan).
- Government borrowing was the top contributor to August credit growth. Net government borrowing for August stood at 1,613 billion yuan (compared to 1,176 billion yuan in August 2023).
- Bank lending, another indicator of stimulus, remained weak. New bank lending for August declined by 22% year-over-year (yoy). This is better than the 30%+ decline observed in the past few months, but it is still too weak to offer meaningful stimulus.
- Household deleveraging continued. Bank lending to households in August amounted to 190 billion yuan (compared to -392 billion yuan in August 2023). Since this figure includes lending to small businesses, actual household borrowing was likely even weaker.
- Additionally, August fiscal saving increased by 559 billion yuan (compared to -8.8 billion yuan in August 2023). This large increase in fiscal saving offset the jump in August government borrowing and suggests a moderation in August fiscal expenditure growth.
- Elevated August fiscal saving is partially due to the inevitable lag between borrowing and spending. But the fact that the central government accounts for more than 60% of August government borrowing amplifies the lag, as nearly two-thirds of central government borrowing needs to be transferred to local governments, who are responsible for the great majority of spending. Finding enough spending projects that both align with Beijing’s priorities and are also “shovel-ready” is a challenge for fiscal stimulus this year. Thus, as discussed further below, we are watching not only for news of increased deficit borrowing but also progress by Beijing in guiding local governments to spend funds more quickly.
There are also signs that PBOC is now more worried about deflation risks. Former Governor Yi Gang emphasized the need to tackle deflation during a recent high-profile speech. This morning, PBOC published a Q&A on the August credit data, which stated that “price stability and modest inflation are key objectives.” This is the PBOC’s strongest language on deflation in recent months and suggests that Yi Gang was to some extent speaking for the bank in his comments. We should expect further monetary easing, such as an RRR cut, in the coming weeks. Nonetheless, due to concerns over banks’ narrow net interest margins as well as the potential for exchange rate depreciation, monetary stimulus will play only a supporting role in coming months with fiscal policy as the key driver.
Xi’s urgency on growth to speed up incremental fiscal stimulus
Yesterday, Xi Jinping held a meeting on ecological protection and high quality development while on tour in Gansu Province. At the end of the speech, he called on local officials to “grasp economic work in late Q3 and Q4 and strive to achieve the full year social and economic development goals.”
This comment is marginally positive for the stimulus outlook:
- Xi is reaffirming the importance of the growth target and in particular underscoring the importance of moving quickly. Xi seems to have internalized (at least partially) the deterioration in economic activity and sentiment over the last few months.
- The comments increase the probability (already our base case) that Beijing will announce an expansion of the fiscal deficit this year in the form of CNY 1 trillion in special bond issuance by the central government, largely to fund infrastructure and manufacturing initiatives. Formal approval would likely come at the next National People’s Congress Standing Committee meeting, which should be held in Mid-October.
- One of the key bottlenecks for fiscal stimulus this year has been not just the amount of financing but also indecision as to which projects should go forward (as Beijing tightens oversight of local government finances). Thus, we will be watching not only for a deficit announcement, but also whether the State Council provides clear direction on spending priorities. We have noted that incremental fiscal stimulus is already in the pipeline through a recent increase in bond issuance, so that guidance is important for speeding the transition from issuance to actual spending. That could come at the next State Council (cabinet) executive meeting, which could be held any day (these are usually held every 2-3 weeks and the last meeting was end-August).
At the same time, one should not overstate Xi’s comments – they do not imply that the “bazooka” is coming. Xi and the rest of the government are showing stepped up urgency regarding the growth target but not panicking about the state of the economy or social unrest. It is positive that Xi made this statement in a meeting that was not focused on growth, but the overall policy mantra remains “high quality development” including a focus on fiscal/financial discipline.
Xi’s phrasing of “strive to achieve” the full-year goals is actually slightly softer than the readout of the Third Plenum meeting on July 19, which said that the Party leadership “emphasized unwaveringly achieving” the full-year goals. That may indicate some realism around the practicality of hitting 5% without major policy easing. In short, Xi is urging fast action but not throwing discipline to the wind.
