Worst performance in almost three decades
China’s economy recorded growth of just 6.6% YoY (year-over-year) last year, its slowest pace since 1990. The country’s growth in the fourth quarter was even more dismal, at just 6.4% YoY. The last time China saw a worse quarterly performance was in early 2009, at the height of the financial crisis.
Strong action needed
As reported by CNBC, during the National People’s Congress, Chinese premier Li Keqiang stated that the country needed “stronger mitigating action,” as the growth slowdown is expected to continue this year. China has announced several stimulation measures, including cutting its reserve requirement ratio and other soft measures such as urging commercial banks to increase lending to the private sector and small businesses.
On March 5, Li announced additional stimulus measures, including tax and fee cuts of ~2 trillion Chinese yuan. He also announced a reduction in the manufacturing sector’s value-added tax rate from 16% to 13%, and outlined plans to increase China’s infrastructure financing by raising special bond issuance quota for local governments to $320 billion from $283 billion. The government has set up a budget deficit target of 2.8% of the GDP this year, compared with 2.6% in 2018. This higher deficit aims to accommodate higher tax cuts and infrastructure spending plans.
These stimulus measures did not come as a surprise to market participants, as they were expecting China to announce proactive measures to shore up its slowing economy. Chinese stocks celebrated the announcement of stimulus measures and climbed to nine-month highs on March 5. This year, due to US-China trade optimism, Chinese stocks Tencent (TCEHY), Baidu (BIDU) Alibaba (BABA), NIO (NIO), and JD.com (JD) have risen 11%, 1.5%, 36%, 53%, and 38%, respectively. US markets (SPY), including all FAANG[1.Facebook, Apple, Amazon, Netflix, and Alphabet’s Google] stocks (FB)(AAPL)(AMZN)(NFLX)(GOOG) have also bounced back after the Q4 sell-off.
However, China will have to be very cautious as it increases its budget deficit target to stimulate its economy—it will have to strike a balance between propping up the economy and avoiding another debt crisis. Next, we’ll discuss this balance further.