Weekly

1. Economic Commentary QNB Economics
economics@qnb.com.qa
October 26, 2014
China’s Latest Stimulus Seems to Have Been Enough to
Page 1 of 2
Avoid a Hard Landing
China’s latest stimulus measures seem to have
been enough to avoid a hard landing.
According to the National Bureau of Statistics
(NBS), real GDP growth slowed to 7.3% in Q3
2014, which is broadly in line with QNB
projections of 7.5% for 2014 (see our China
Economic Insight Report). The global economy
should, therefore, be spared the negative
impact of a Chinese hard landing, thanks in
part to repeated injections of fiscal and
monetary stimulus this year. However, the days
of voracious Chinese demand driving up global
commodity prices are probably over.
China Real GDP Growth
(% change, year on year)
Sources: NBS and QNB Group analysis
13
12
11
10
9
8
7
In light of slower global and domestic demand,
the Chinese authorities have introduced a
series of stimulus measures in 2014 to achieve
their growth target of 7.5%. Following the
release of Q1 GDP data in April, the
government provided tax breaks for small
companies, spending on high speed railways
and increased financing for social housing. In
April and June, the central bank cut the reserve
requirement ratio for rural banks and banks
lending to the agricultural sector and small- and
medium-sized enterprises. This was followed in
September and October by two rounds of
liquidity injections in the form of three-month
loans to banks amounting to more than
USD110bn. Finally, the central bank cut its
benchmark lending rates on 14-day repurchase
agreements twice over the last 30 days.
These stimulus measures seem to have been
sufficient to prevent a sharp drop in growth, but
the economy is still slowing at a gradual pace.
Real GDP growth remained well above 7.0%
throughout the first nine months of 2014,
compared with an average of 7.7% in 2013. It
is expected to continue slowing gradually in
2015-16, which may result in a soft landing.
However, stimulus measures have been so far
insufficient to keep growth above the
government’s 7.5% target. This may be
because stimulus measures are being offset by
regulatory restrictions on lending in the shadow
banking sector and by weak global and
domestic demand.
The various stimulus measures have not
resulted in higher overall lending to the
economy. Total social financing, a broad
measure of lending in the official and shadow
banking systems, fell 4.6% in the first nine
months of 2014, compared with the same
period in 2013. This was mainly due to a series
of regulatory measures introduced in the
second half of 2013 and early 2014 to restrict
lending in the shadow banking sector.
Notwithstanding this decline, growth in the
traditional banking system (excluding shadow
banks) grew by a healthy 15.9% year-on-year
in August.
The effectiveness of stimulus measures may
be waning as global and domestic demand for
Chinese goods is weakening faster than
expected. The IMF has just revised downwards
its global growth projections for 2014 to 3.3%,
12.1
11.2
10.7
10.4
9.8
9.7
9.5
9.3
7.9
7.7
7.6
7.7
7.7
7.6
7.7
7.7
7.4
7.4
7.3
6
Q1
10 Q4
10 Q3
11 Q2
12 Q1
13 Q4
13 Q3
14

2. Economic Commentary QNB Economics
economics@qnb.com.qa
October 26, 2014
Page 2 of 2
from 3.7% previously. In addition, Chinese
retail sales grew at a slower pace of 11.6% in
the twelve months to September 2014,
compared with an average of 13.2% in 2013.
As a result, indebted companies and
individuals are unwilling to borrow more, even
at lower interest rates, given overall weaker
demand.
At the same time, the government is unlikely to
engage in a new fiscal stimulus to boost
growth. A USD600bn stimulus program
launched in 2008 resulted in overinvestment
and excess capacity in the economy. This in
turn has led to over-indebtedness of
corporations and individuals and significant
excesses in the shadow banking system. To
avoid the mistakes of the past, the government
is therefore likely to accept a gradual slowdown
in growth in the short term and has indicated
that it is unlikely to provide broader stimulus
measures.
Over the medium term, the government is
counting on structural reforms to boost growth
through a shift to a more market-based,
consumption-led growth model as opposed to
investment-led in the past. To achieve this
goal, the government plans to liberalize interest
rates and the financial sector more generally,
introduce market–based pricing of resources
and utilities, allow greater private ownership in
state-owned enterprises, and ease restrictions
on urban migration. This may over time change
the economic model of Chinese growth, where
private consumption is the dominant
contributor.
Given that these reforms will take time to have
an impact, we expect growth to continue
slowing for some time in China. Current
stimulus measures appear to be sufficient to
prevent a hard landing. However, the
ramifications of the Chinese slowdown will be
felt in the rest of the world. China has been the
key driver of global growth since 2009 and its
slowdown will be a drag on the global
economy. Weaker demand from China is also
likely to be a drag on international commodity
prices, including oil prices, for some time to
come.
** Ends **
Contacts
Joannes
Mongardini
Head of Economics
+974- 4453-4412
Rory Fyfe
Senior Economist
+974-4453-4643
Ehsan Khoman
Economist
+974-4453-4423
Hamda Al-Thani
Economist
+974-4453-4646
Ziad Daoud
Economist
+974-4453-4642
Rim Mesraoua
Economist – Trainee
+974-4453-4648
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