- Balancing steady growth and tackling debt reduction and asset bubbles
- Three policy options and their market implications
- Risks to monitor – three factors
Can the balancing act continue in 2020?
Policymaking was a constant balancing act in 2019 between the need for cyclical stimulus to protect economic growth and structural control of the debt and asset bubbles.
The latter involves measures to finish the financial clean-up that Beijing started in 2017. These conflicting objectives have driven the recent strategy of selective policy easing.
So, what are the possible policy and growth outcomes in 2020?
Core scenario – 60% probability
Policy status quo. Beijing continues to ease policy selectively alongside efforts to revamp the financial system. Total credit growth and infrastructure investment are expected to pick up moderately to 10% YoY and 8%-10% YoY, respectively. Real GDP can be expected to grow at 6.1% YoY in this scenario.
Market implications: Mildly positive for both Chinese stocks and government and high-grade bonds, but not necessarily for corporate bonds due to concerns about credit risk and defaults.
Bullish growth case – 20% probability
- Unexpected strong recovery in the car and electronics sectors, China’s two largest manufacturing sectors; resilience in the property sector; receding trade war risk boosting exports, capital expenditure and corporate profits. GDP could grow by more than 7% YoY.
- Market implications: Negative for fixed income, upbeat for equities in the beginning, but the market rally could be short-lived as bullish growth would prompt Beijing to stop policy easing.
Bearish growth case – 20% probability
- Beijing’s balancing act fails, leading to a worse-than-expected slowdown. If GDP growth falls towards 5% YoY, how would Beijing respond?