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What about consumer vouchers? And working less?

(ATF) Given the world economic situation Chiba Gas been using a two-pronged approach to stop markets collapsing and to prevent social unrest. Citizens are being told to thank the party for saving the country from a virulent epidemic and staving off economic collapse.

The call to thank the party, when many suspect party actions – or lack thereof – led to the outbreak in the first place, appears to have caused rifts. In recent months all of the country’s leading economic bodies have said they are bringing in more stringent fiscal controls.

China is a country where shadow bank corruption and back-room deals are common. President Xi has been more severe in his clampdown on miscreants, always tightening the screws, but some fear too much control will take the dynamism out of the economy, already reeling from a first quarter in 2020 that saw almost zero growth.

In a commentary released at the weekend, Jianghai Securities said there is pressure that the annual GDP target must be at least 5.5%, and with negative GDP growth in the first quarter, there is a high probability that the target will not be met, due to a combination of internal and external economic factors.

The commentary could be viewed as a rather radical document – it suggested some major changes in China. As politics is off the table for public discussion, the economy is the main area of debate. It is the Communist Party’s main leg for legitimacy, the other being nationalism, so this document will be widely discussed.

‘Little room for rates to fall’

Jianghai Securities argued “dialectically, if the economic target requirements are high, there is little room for policy relaxation. There is little room for interest rates to continue to fall. There is little room for economic rebound in the later period, and there will not be much risk of rebound in interest rates. On the contrary, if the economic goals are high, there must be more room for policy easing, and there will be more room for interest rates to fall. In the later period, there will be more room for economic rebound, and interest rates will face more room for rebound. 

“Therefore, the goals of the economy, the room for policy relaxation, and the magnitude of interest rate fluctuations are all symmetrical. Of course, the current market is worried about the pressure on the bond market from the rapid economic rebound in the future. However, we don’t think we need to worry about it at the moment. After all, it is still in a pessimistic economic situation and requires a more relaxed policy stage.

“Therefore, there is still room for downward interest rates in the short term. Of course, we also need to be alert to the rapid rebound pressure on interest rates once the economy recovers, and there is no pressure to increase supply and tighten capital.

“If special government bonds are issued to the market, the central bank will also need to cooperate with the investment to avoid a rapid rebound in market interest rates. Of course, after the issuance of special government bonds, funds are invested in the real economy, which is conducive to economic improvement. This is the pressure that the bond market needs to face. However, fiscal stimulus to the economy is still a slow variable and will not be of immediate benefit.”

China now plans to issue trillions of yuan in bonds to keep the workforce busy while the world economy is idle, in a simple but effective plan, but it does not really help the ‘real economy’, as senior cadres promise. It will build government-owned infrastructure, but could have mixed results in cost-benefit analysis.

Jianghai Securities argued that “reducing loan interest rates should be the main focus of monetary policy in responding to the epidemic”, and said guiding the decline of loan interest rates meant that bank costs should be reduced.

“We do not deny that reform of the LPR (Loan Prime Rate) is indeed beneficial to reducing the cost of enterprises, but after all, this speed is too slow. Refinancing can also reduce corporate costs, but it is not large enough. And if we want to continue to lower lending rates, and if a wider range of companies can enjoy the decline in lending rates, we must reduce bank costs. And the past model that relies on the decline of the MLF (Mortgage Liquidity Facility) to push the decline of LPR is too slow, so it is necessary to reduce the cost of the banks’ big debt, which is the deposit interest rate.”

Consumer vouchers?

Besides lowering loan rates, Jianghai Securities suggested the government should issue consumer vouchers – a mechanism similar to universal basic income, it could give consumers free vouchers to exchange for goods to stimulate growth.

“It is undeniable that consumer vouchers can definitely stimulate consumption in the short term, but how long they would persistence is unclear. After all, the decline in residents’ income is now expected to be strong. The issuance of consumer vouchers is similar to a discount on goods. Consumers would still have to pay extra cash for consumption. It may be effective for ‘rigid’ consumer goods, but the stimulating effect on optional consumer goods may not be good, because the expected decline in income, residents will reduce consumption of optional consumer goods. In addition, only by continuously issuing consumer vouchers would it be possible to continue to promote the expansion of consumption so there is no uncertainty about the sustainability of consumer vouchers for consumption promotion.”

Jianghai Securities also called for a stimulation of automobile purchases, a reduction in working hours and encouraging domestic tourism.

Some cities plan to introduce a 4.5-day working week. However, Jianghai Securities said: “We believe that it is not that residents do not have time to travel and spend, but that their income is expected to decline. Judging from the subways in various places, the flow of people usually resumes quickly after work, but once it’s the weekend, the subway’s flow of people declines, which shows that everyone has time to spend but not money. Many companies now have orders that are not completed. After resuming work, they find that there is not much demand, which may be the key issue. Therefore, there is still uncertainty as to whether working hours can drive an expansion of consumer demand.”

And lastly, Jianghai Securities believed holding bonds was the best strategy: “Although the fiscal deficit has widened and the issuance of special treasury bonds will exert emotional pressure on the bond market, the overseas epidemic has not eased, and the pessimistic expectations of the economy cannot be reversed immediately.

“There is still room for loose monetary policy. The coupon does not move. In fact, the bond market has been very volatile in recent times. We believe that we should grasp the main line, reduce the frequency of transactions, and avoid the market’s disorderly fluctuations. Of course, if you are affected by emotions in the short term and interest rates rebound to a certain extent, you can increase your position. In short, the macro economy must rise, and a reduction of interest rates is a necessary prerequisite, so the bond market has not yet reached the time of retreat.”

Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.


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