China: Fiscal stimulus initiated by the State Council – Nomura

Analysts at Nomura note that Yesterday’s State Council meeting of China called for employing a more pro-active fiscal policy, opening up projects previously monopolised by the government to the private sector, and guiding financial institutions to meet reasonable financing needs of local government funding vehicles (LGFVs).

Key Quotes

“Though the State Council emphasises that it will shun a comprehensive and massive stimulus, we interpret the State Council announcement yesterday as the official initialisation of fiscal stimulus, adding support to our calls last week and our earlier forecasts of more pro-active fiscal spending in mid-June.”

“In addition to the People’s Daily’s call for “stabilising leverage,” the new details of regulations on asset management businesses released last Friday and the RMB502bn PBoC cash injection through medium-term lending facility (MLF) yesterday, it is now quite clear that Beijing has fully shifted its policy stance from the original deleveraging towards fiscal stimulus that will be underpinned by monetary and credit easing.”

“Impacts on the economy and markets: short-term positive

• With regard to the economy, despite the shift of Beijing’s stance towards stimulus, we expect growth to weaken before staging a moderate rebound.
• More specifically, we expect infrastructure fixed asset investment growth to recover from its current low in the next couple of months, but export growth may slump in Q3.
• The State Council’s messages are likely to be positive for capital markets in the short term, and China’s severely hit high-yield bond markets should especially benefit from the stimulus.”