China: Why Is Policy Still Restrictive?

Several reasons may be behind Chinese authorities’ excessively restrictive policy stance.

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  • 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.

The U.S. Dollar Debt Hangover: Sectors And Regions To Avoid

Two seminal Bank For International Settlements (BIS) U.S. dollar papers form the basis for the research in this Global Alpha Sector Strategy Special Report. The first working paper delved into details on U.S. dollar debt raised outside the United States and the implications on liquidity. The second paper discussed non-financial corporate dollar credit and carry trades at the company-level.

Given the importance of the direction of the dollar, the purpose of this Special Report is to identify trouble spots in equity sectors in specific geographies that could turn into potential minefields were the U.S. dollar to continue climbing.

Our analysis comprises two parts: first we created a two dimensional (2D) picture of sector (ex-financials) indebtedness (using net debt-to-EBITDA on y-axis) and valuation (using EV/EBITDA on x-axis) in order to confirm that basic resources sectors are a potential sore spot. Geographies covered include the world, U.S., Europe, Japan, EM, China, Canada, Australia and the fragile five. Within EMs we focused on the fragile five as they are more vulnerable to a crisis due to their twin deficits.

The second part of the analysis revolved around the financial sector in each region, especially the fragile five in order to gauge if any of the high dollar debt risks are reflected in the respective banking sectors.

For additional analysis on what sectors to avoid and in what geographies you can access the Global Alpha Sector Strategy “The U.S. Dollar Debt Hangover: Sectors And Regions To Avoid”, dated September 25, 2015, available at gss.bcaresearch.com.

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