More evidence of a fiscal expansion aimed at boosting consumption is needed before the company reconsiders its stance on China’s ability to overcome deflation risks, he said.
Ahya also shared his views on how effective these recently announced monetary and fiscal stimulus measures will prove to be in helping China escape its current cycle of debt and deflation.
This is the verbatim transcript of the interview.
Q: How did you interpret the press conference? Did you get any new information about the stimulus measures?
A: We were looking at this announcement from a unique perspective on whether they are going to increase their fiscal deficit and what is the scale of the fiscal expansion. And secondly, will this fiscal expansion be directed at consumption? The need of the hour in China is to raise the fiscal deficit and shift it towards consumption to address the problem of deflation.
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That said, what we are hearing from policymakers is that they are going to make very little effort to stimulate the demand that is driving consumption. And no figure was given in terms of the magnitude of the fiscal expansion that will be undertaken. They weren’t likely to make a full announcement today, but the outlines were even lower in terms of details than the market and we expected.
Q: Can you explain your understanding of the measures announced ahead of the holiday week? They had announced a fiscal package, and some of the interpretations of it were that they were going to give some money to families with two or more children, and that they were also going to raise special bonuses in yuan, and that those yuan would be transferred to local authorities . governments. Can you interpret the fiscal measures announced so far?
A: They announced three things that day. On September 23, they announced a set of measures, and then there were some more, but ineffective ones, that were focused on number one to boost the stock market. To this end, the People’s Bank of China (PBOC) announced an on-lending program. Number two was some support for the real estate sector, and number three was taking some real economic measures in the form of monetary and fiscal easing.
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However, the fiscal expansion figure was not given. They simply mentioned that they will take fiscal expansion as needed. It was a news story from Reuters, which speculated that they would announce a fiscal stimulus of RMB 2 trillion intended, in part, for local debt restructuring, and 50% of that (2 trillion would go to consumer stimulus). So it was precisely that Reuters news that raised expectations, and today we do not hear any figures in terms of a RMB 2 trillion stimulus or even any kind of mass consumption stimulus details.
Q: In that case, this is a big disappointment. Even last week, when we were reporting this statement from China, we suspected that these were not official government statements. There seem to be more interpretations. So would you now reduce your growth in China, considering you don’t have any confirmation of effective fiscal stimulus?
A: We have already reduced our growth in China, and we have reduced it to 4.6% against the government’s target of 5% and if aggressive policy measures had been taken, we would have had to raise our growth estimates. So for now we’re going to stick with our forecast, but just in terms of the framework of analysis of China’s history, the way we were thinking is that considering the fact that they have this deflation problem – unless and until they fix it. the problem of deflation, all measures taken to support the stock market will not result in a sustainable change in investor confidence. I took advantage of our experience of looking at Japan in the past.
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Thus, when Japan announced the first round of ETF purchases to boost the stock market along with some monetary policy easing measures in December 2010, there was a rally of around 20% in the major options. However, that rebound was not sustained because the government did not follow through with an action plan that could systematically solve deflation. So we are operating with the same framework when it comes to China and therefore the market is probably also looking at this fiscal expansion much more closely to see if they are going to be able to solve the deflation problem.
Q: Does your team suspect that the market has overestimated a possible Chinese recovery and, more importantly, a commodities recovery? Now, do you think that there will in fact be continued disinflation and that the rally in raw materials can be questioned?
A: Our equity strategy team released a note this morning and they are still underweight China, and it is somewhat similar to the view I mentioned earlier that we will need to see more evidence of a consumer-driven fiscal expansion for us to change our view. that China will be able to get out of this deflationary loop or the risks of deflation.
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