China's macro leverage is likely to jump 25ppts in 2020
Modest support so far, more stimulus to come
China responded quickly in early February with liquidity injection, policy rate cuts, and 1.4% of GDP of fiscal support mainly in corporate tax and fee cuts. Additional responses lagged other major economies in light of global developments, partly due to the delay of the National People's Congress (NPC) meeting. Recent Politburo meetings signalled more stimulus and we expect another 2.2% of GDP in public spending this year, mostly in infrastructure while subsidies to unemployed and low income people may rise somewhat.
We expect 4% of GDP in fiscal stimulus and 12.5% total social financing (TSF) growth in 2020.
Including the 1.4% of GDP of fiscal support already announced and the 0.4% of GDP in tax & fee cuts carried over from 2019, total fiscal stimulus should amount to 4% of GDP. This would be bigger than the 2% stimulus in 2016 and but pales to the 10% in 2009. We expect the broad deficit expansion to be financed by >1 trillion in special treasury bonds, >1 trillion increase in special LG bonds, and more LGFV borrowing and bank lending. Additional monetary easing including 50 bps RRR cut, 10-20 bps rate policy cuts and easier lending rules should help TSF credit to grow by at least 12.5% and credit impulse to jump 4.3% of GDP from end-2019.
"New infrastructure" too small, needs old ones too.
With the additional spending, we expect infrastructure investment growth to accelerate from 3% in 2019 and -16% year over year in Q1 to >10% in 2020. The government has emphasized the so-called "new infrastructure" projects including 5G, industrial internet, data centers, etc. However, these only amount to RMB 800-900bn (or equivalent to ~5% of 2019 total infrastructure FAI). Therefore, the "old" infrastructure projects such as transport, urban public facilities, water and environmental projects would need to be supported as well.
No major property easing so far but hope on hukou and land reforms.
As expected, there has been only marginal property policy easing at the local levels and no major easing at the central level. However, property sales and sentiment have been helped by easier liquidity and lower rates. Recent hukou and land reforms may bring additional property demand and construction, along with the government's plan to double old town renovation. Local government incentives and the impact of the COVID-19 outbreak on household income and outlook are key considerations.
Policy scenarios and risks
A significantly larger fiscal stimulus (say 6% of GDP) coupled with property easing could lead to stronger recovery and 2020 GDP growth to close to 3%. Alternatively, growth could be close to 0 in the case of a much smaller package or slower implementation. In our base case, we expect China's debt/GDP ratio to rise by 25ppts and banks NPLs to rise substantially. However, with government debt still manageable, high domestic savings and public ownership of banks, we do not see imminent financial system trouble.