“Supply-Side Reforms” to Cut Overcapacity
Though many statistics are missing because of the Chinese New Year, we are optimistic about the economy, based on available data. In January, monetary policy continued the expansionary trend it began last July. Narrow money, M1, rose 18.6% y/y, up 3.4 pps from December, finally recovering to 2003 levels, when the economic situation was quite good. If the current monetary growth trend can be maintained, the year’s money growth rate could recover to 2009 levels.
The broad money supply, M2, rose 14% y/y, up by a mild 0.7 pps from December. Savings deposits from non-financial enterprises rose 14.7% y/y, up 1 pps, of which checking account deposits rose 23.2% y/y, up 1.4 pps, and up 24.4 pps from their March low. Total RMB loans increased by 2.51 trillion yuan, comparable to the amount combined in last January and February.
Both exports and imports plunged in January. Exports fell -11.4% y/y, and imports fell -18.6% y/y. Weak exports were due to the still-overvalued yuan.
In January, CPI was up 1.8% y/y, and up 0.2 pps from December. The ex-factory price index of industrial products decreased -5.3% y/y, and decreased -0.5% m/m, up 0.6 and 0.1 pps from last December respectively. PPI fell -6.3% y/y, up 0.5 pps from last December, and fell -0.7% m/m, the same as in December. The deflationary cycle might be ending soon.
On January 22nd, Prime Minister Keqiang Li held a state council meeting, where he spoke of reducing the enterprise burden by cutting taxes, and converting sales taxes to value added taxes nationwide. On February 2nd, the People’s Bank of China and the Banking Regulatory Commission announced they were reducing the mortgage down payment ratio in most cities, to reduce the housing inventory. Both events derive from the supply-side reform top Chinese leaders began speaking about in November. Supply-side reforms not only traditionally cut taxes for firms, but also allow for cutting overcapacities and over-leverage, by letting “zombie” firms die, to address capital misallocation and boost aggregate productivity.
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