UBS China Question of the Week - What More Policy Stimulus Can We Expect?

Table 1: Policy stimulus incorporated in our 2009 forecast
Source:  UBS forecasts

Our Answer
The Chinese government has in recent weeks announced a series of fiscal and monetary policy measures aimed at sustaining domestic demand. Some of these measures are very specific, but most are still vague, and the abolishment of credit quota - what we consider the big move in monetary easing - has been met with strong scepticism amid a rapidly deteriorating external and domestic outlook. What more can we expect? We expect:
- More concrete plans on the fiscal stimulus in the coming 1-2 months
Following policy guidance of the State Council, we believe specific plans are being drawn up by various ministries and local governments, to be discussed in the coming Economic Work Conference. Our 2009 GDP forecast of 7.5% incorporates a widening of budget deficit of 1.7% GDP, which largely (1¼%) comes from increased fiscal spending and tax cuts. The rest is the automatic stabilizer effect - weaker revenue as a result of weaker growth. As part of the overall fiscal expansion, we think about 1% of GDP, or RMB 300 billion, needs to be outright spending on infrastructure, public housing, and social programs such as health and education. Given the weak sentiment, we believe direct government spending would be more effective in stimulating domestic demand than tax cuts, especially corporate tax cuts.
- Increased government investment on public housing, and credit and land policy support for investments in mass market residential properties
We do not think the recent initiatives in the property sector are sufficient to reverse the downward trend of housing investment, nor will the reduction of the down payment for second mortgage. The over supply in the higher end of the housing market will take time to clear, but we expect the government to focus on increasing investment in the lower end market to ramp up housing investments and construction activity. To encourage investments in the mass market, local governments will have to be persuaded to provide reasonably priced land, and banks will need to increase lending to developers, in addition to the policies to subsidize the low-end buyers. 
- Increased coordination between fiscal stimulus and bank lending
We had long argued that the most significant monetary policy easing would be the lifting of credit quota. Now this has been announced, there is a growing risk that banks will be reluctant to increase lending in the economic downturn. We still believe that demand for loans remains above the quota, and the relatively healthy balance sheet of the corporate and banking sector provide room for increased lending. However, to reduce the risk and help to jump start falling activity, we think increased government investment in the above areas could help bring matching bank financing, as would the establishment of government guarantee programs (especially with respect to SMEs and rural financing).