WHY OLD-SCHOOL CHINESE WON´T HELP / THE WALL STREET JOURNAL

Why Old-School Chinese Stimulus Won’t Help

By Nathaniel Taplin

When China slowed sharply in 2015, debt-ridden state-owned enterprises and property developers needed a bailout. The government turned to cash-rich households for help.

Now China is slowing again: Growth in 2018 was just 6.6% according to official figures, the slowest in 28 years. This time around, SOEs and real estate look better, while households and private companies are struggling. That will shape Beijing’s policy response, and probably disappoint investors hoping for a 2009- or 2015-style lending splurge.

The roots of the current downturn can be found in the response to the last one. By 2015, years of overinvestment had pushed housing inventories sky-high and state-owned steel and cement margins through the floor. To solve the problem, Beijing gave banks the green-light to ramp up mortgage lending—helping property developers run down inventory and goosing construction, in turn pushing SOE steel and cement margins back higher. Mortgage loans outstanding, growing at 17% in early 2015, were rising 35% on the year by the end of 2016. Over the same period, growth in all other bank credit outstanding slowed to 9.5% from 14%. The widely hailed “deleveraging” in 2016 and 2017 was more of a debt reshuffling.

This all worked a little too well: Housing prices in China are still rising at 10% on the year. But households are much more indebted. Consumer spending isn’t collapsing—real per capita urban disposable income for 2018 was up 6.5% on the year, against 6.6% in the first quarter, and per capita expenditures actually accelerated. But consumers facing high interest payments probably are belt-tightening now as the labor market deteriorates. Debt payments knocked nearly 2 percentage points off nominal, effective urban income growth in the third quarter, according to Gavekal Dragonomics. Western companies selling premium products such as Apple, which in early January blamed its revenue guidance cut on slowing growth in China, have begun to feel the chill.

Housing prices in China are still rising at 10% on the year. But households are much more indebted. Photo: bobby yip/Reuters 



All of this means another big lending splurge looks counterproductive, since it will just mean higher mortgage payments. Beijing is likely to focus on shoring up income growth and purchasing power instead. Further tax cuts are likely. Some quiet relaxation of strictures on shadow financing, to help cash-strapped private employers, is also in the cards. And to shore up investment, policy makers will likely focus on infrastructure rather than housing, funded by heavy provincial government debt issuance.

Unfortunately for commodities investors, that isn’t really a recipe for a 2016 style rally, because infrastructure is usually less metal intensive than residential construction.

If and when housing prices start drooping and state-owned industrial companies start defaulting, Beijing may have to pull out the big credit-stimulus gun again. In the meantime, investors will have to be satisfied with a softer touch.