China's new raft of stimulus measures are long overdue, says Natixis Chief Economist for Asia Pacific Alicia Garcia-Herrero, but they are just not aggressive enough and don't focus on what China's economy needs: incentives to boost domestic consumption.
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00:00The overall goal of this new raft of stimulus measures is to hit China's 5% GDP growth target for this year.
00:09But taken apart individually, what does each of the measures do exactly?
00:15Well, the cut in the reserve requirement ratio, this RRR, as we know it by now, is all about liquidity.
00:25So liquidity is great because there is an increasing lack of liquidity in the banking sector in some areas,
00:33especially for those exposed to developers.
00:36Developers are a small amount of total loans, but for some small banks, you know, they were very exposed.
00:44And more importantly, local governments.
00:46Real estate from the local governments is literally seven times larger than developers.
00:54So just to give you a sense of the dimension of, and because many of these vehicles are not really paying back,
01:00banks are starting to feel the pinch.
01:03Then they cut on the loan prime rate, which is the benchmark for mortgages.
01:08I think that's long overdue as inflation is high.
01:12In China, real interest rates are very high because there is deflation, at least in producer prices, in GDP prices.
01:20And in CPI, it's basically close to zero.
01:22Thus, mortgages are hard to finance because of this situation.
01:27China, of course, has been facing a number of very difficult economic challenges.
01:33It has been for months.
01:34So how aggressive would you say that these new measures are in addressing those issues,
01:40especially compared with how the Central Bank of China has acted in the past?
01:46It's not aggressive yet.
01:49Bear in mind that there's so many things that they need to do.
01:53This is just the beginning, in my view.
01:55I mean, if you want to see a major change in growth prospects, you need to see much more.
02:00Just to note that interest rates or sovereign bond yields continue to go down.
02:06Yes, stock market is going up.
02:08That's a good signal.
02:09But stock markets, compared to the bond market signal, do react to any sign of stimulus because they're starving for it.
02:17I mean, that sign doesn't mean it's sustainable.
02:20It only means that they're happy about the temporary stimulus.
02:23What other steps do you think should be taken by China as it seeks to improve its economic performance for this year?
02:29I think they need to design a comprehensive program.
02:33They need to say they're going to spend on fiscal.
02:36How?
02:37I would expect them to say it's targeted to the consumer.
02:41So, not just infra-spenditure or just additional issuance of local government bonds, as they usually do.
02:48Quotas.
02:49I mean, no.
02:50We need to know where they're spending the money, and that must be the consumer.