More evidence of fiscal expansion aimed at boosting consumption is needed before the firm reconsiders its stance on China’s ability to overcome deflation risks, he said.
Ahya also shared his view on how effective these newly announced monetary and fiscal stimulus measures will prove in helping China escape its ongoing debt-deflation cycle.
This is the verbatim transcript of the interview.
Q: How did you interpret the press conference? Did you get any fresh insights into the stimulus measures?
A: We were looking out for this announcement from a single perspective as to whether they are going to push up their fiscal deficit higher, and what is the scale of fiscal expansion. And secondly, is this fiscal expansion going to be targeted towards consumption? The need of the hour in China is to lift the fiscal deficit and target it towards consumption to address the deflation problem.
Also Read | What happens after Nifty 50 declines by 4% or more in a single week?
Having said that, what we heard from the policymakers is that they are going to take up a very small effort towards demand stimulus that is pushing in for consumption. And there was no number given in terms of the magnitude of fiscal expansion that will be taken up. It wasn’t likely that they were going to make a full announcement today, but the contours were even lower in terms of the details than what the market and we were expecting.
Q: Can you take us through your understanding of the measures announced before the holiday week? They had announced a fiscal package, and some of the interpretations of that were they were going to give some money to families with two or more children, and that they were also going to raise special yuan bonds, and that yuan will be transferred to local governments. Can you interpret the fiscal steps announced so far?
A: They announced three things on that day. On September 23 they announced a set of measures, and then there were some more later, but ineffectively, that was focused on number one to boost the stock market. There was a re-lending program announced by the People’s Bank of China (PBOC) for that. Number two was some support to the property sector, and number three was to take some real economic measures in the form of monetary and fiscal easing.
Also Read | China rally may be short-lived, putting India back in favour: Macquarie
However, the fiscal expansion number was not given. They just mentioned that they will take a fiscal expansion as necessary. It was a Reuters news story, which was speculating that they will announce a 2 trillion RMB fiscal stimulus targeted towards, in part, local debt restructuring, and 50% of that – 2 trillion was going to go towards consumption stimulus. So it was just that Reuters news story which had raised expectations, and then today, we didn’t hear any number in terms of a 2 trillion RMB stimulus or even some kind of detail of big consumption stimulus.
Q: This is a major disappointment in that case. We suspected even the week before when we were reporting this statement out of China, that they were not official government statements. There seem to be more interpretations. So now would you scale down your China growth, considering that you don’t have any confirmation of effective fiscal stimulus?
A: We have already cut down our China growth, and we have brought it down to 4.6% versus the government target of 5% and if there were to be aggressive policy actions taken, we would have had to lift our growth estimates. So as of now, we are going to stay put with our forecast, but just in terms of the framework of looking at the China story, the way we were thinking about is that considering the fact that they have this deflation problem – unless and until they fix that deflation problem, all the actions taken to support the stock market will not result into a sustainable turnaround of confidence for investors. I was drawing in from our experience of looking at Japan in the past.
Also Read | Nifty 50, Sensex finish nearly 1% higher; BSE mcap grows by ₹8 lakh crore
So Japan, when it announced the first round of ETF purchases for a stock market boost alongside some monetary policy easing measures in December 2010 there was about a 20% rally in top picks. However, that rally was not sustained because the government did not follow up with an action plan that could fix deflation in a systematic manner. So we are operating with that same framework as far as China is concerned, and therefore market is also probably looking at this fiscal expansion far more closely whether they are going to be able to fix that deflation problem.
Q: Does your team suspect that the market has overestimated a possible Chinese recovery, and, more importantly, a commodities recovery? Now, does it look to you that there will in fact be continued disinflation and the rally in commodities may be questioned?
A: Our equities strategy team has put out a note this morning, and they are still maintaining underweight on China, and it is sort of similar to the view that I mentioned earlier, that we will need to see more evidence of fiscal expansion targeted towards consumption for us to change our view that China will be able to get out of this deflation loop or the deflation risks.
For more, watch the accompanying video