Several reasons may be behind Chinese authorities’ excessively restrictive policy stance.
- First, top leadership believes that the Chinese economy is in a structural deceleration, and therefore growth difficulties are regarded as the “new normal”. The still-buoyant labor market situation adds comfort to this judgement.
- Second, policymakers are preoccupied with the idea that the economy needs painful but eventually rewarding economic reforms, while short term policy easing endangers reforms and leads to further structural imbalances.
- Finally, the harsh anti-corruption campaign imposed by the top leadership has discouraged civil servants to follow through on growth-boosting measures to support the economy.
In recent months, the Chinese authorities have been increasingly inclined to more aggressive policy reflation with new growth-boosting measures continuously announced. However, total deposits of government and government agencies at the central bank and commercial banks have continued to rise, currently standing at a staggering RMB 25 trillion, or 37% of GDP. This means that the traditional “transmission mechanism” of fiscal pump-priming is not functioning well, and the economy still faces strong policy headwinds.
Overall, our China Investment team believes that China’s unduly restrictive policy environment, either due to poor judgement on the macro situation or due to the blocked transmission mechanisms of policy easing, has been the key reason for the economy’s growth deceleration. Any moves to address these issues will provide important relief on both the economy and financial markets. Otherwise, the economy will likely continue to face downward pressure, which bodes poorly both for China and for global risk assets.