Noticeable recently have been determined attempts by Chinese policy officials to talk up the economy. One oft-repeated mantra emerging from Beijing is that the economy started to turn the corner last month in response to some of the stimulatory measures adopted previously. Thus far, the evidence to back up this claim is decidedly mixed. A gauge of non-manufacturing produced by the National Bureau of Statistics and the China Federation of Logistics and Purchasing registered a 3mth high in June, although the various PMI surveys for the manufacturing sector released over recent days suggest activity remains quite subdued. Moreover, lending by China’s four major banks fell sharply last month, by almost 25%!
Notwithstanding the official rhetoric, our sense is that China will continue to press ahead with additional measures to ease financial conditions and the stance of monetary policy in the months ahead. At a local level, policy officials have been prepared to relax property controls, with Beijing prepared to look away in most instances. These measures have included home subsidies and discounted mortgages for first-home buyers in some major cities. While officially still determined to prevent house prices from rising, the central government is also keen to prevent property prices from falling too quickly in some areas. With an increasing number of the larger developers experiencing financial difficulties, new construction is still declining in many areas.
As we have been arguing recently, there is still plenty of potential for China to ease monetary policy in the next few months, including lower interest rates and some further reductions in bank reserve requirements.