Disappointing economic data recently may trigger more policy reaction. Real activity data has mostly fallen short of expectations; in addition, trade and monetary data has al o underwhelmed. In a seminar held yesterday, Premier Li discussed economic developments and policies with economists and entrepreneurs, and noted the need to strengthen efforts to stabilise growth.
While he emphasized the use of targeted policy easing and structural reforms, we think broad-based policy easing is no longer taboo, following two rate cuts and one RRR cut since Q4-2014. Downside risks to both growth and inflation have strengthened the case for more decisive policy action.
Fiscal policy will likely be more proactive in the months ahead. While the budgeted deficit for 2015 was raised only slightly to 2.3% of GDP, from c.2% in 2014, adjustment following widely accepted fiscal accounting shows the 2015 budgeted deficit is effectively 2.7% of GDP, relative to an estimated actual deficit of 1.7% of GDP in 2014.
"More proactive fiscal policy is expected following the approval of the budget in March, which should provide some cushion when the local governments' extra-budgetary activity is constrained by tighter debt control", says standard Chartered.
Monetary policy may continue to be in the spotlight. M2 money supply grew by only 11.6% y/y in March, below expectations and lower than the 12% target. Total social financing (TSF) also disappointed despite strong loan data. The central bankgovernor indicated recently that the government would closely monitor the deflation risk and said there is room to act via interest rates and quantitative measures.
"We think the People's Bank of China (PBoC) will continue to target M2 growth of 12% or above for the year, and guide funding costs down to support the real economy", added Standard Chartered.
