Fiscal taps turned off, Spring Festival travel subdued - Capital Economics
China Economics

Fiscal taps turned off, Spring Festival travel subdued

China Economics Weekly
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A rush to meet annual spending targets pushed China’s quarterly budget deficit to the second largest on record at the end of 2020. But the government has now turned off the taps. Local government bond issuance has dried up altogether since the start of 2021 – a striking contrast with what happened in January in the last couple of years. And the finance ministry has confirmed that key elements of its pandemic response have been halted. Meanwhile, data from the first day of the “Spring Festival travel season” yesterday suggest that the official drive to halt the annual Lunar New Year migration is working.

Lunar New Year travel kicks off with a whimper

Yesterday was the first day of what the government calls the “Spring Festival travel season”, which lasts 40 days. During this period, the Ministry of Transport (MoT) publishes daily data on long-distance passenger numbers. This year, just 18.1m trips were made on the first day, compared with 69.6m in 2020 (shortly before travel restrictions were imposed) and 67.5mn in 2019.

This subdued start to what is usually the world’s largest annual human migration reflects a raft of recent government measures aimed at discouraging holiday travel following China’s worst COVID-19 outbreak since March. The virus situation now appears to be coming under control, with new cases reported today the lowest in three weeks. But that probably comes too late to save the holiday, with both officials and households likely to err on the side of caution for a while.

Last week, the MoT predicted that virus containment measures would lower holiday travel by 40% relative to 2019. Yesterday it slashed that to a 60% decline. Even that could prove too optimistic given that trips were down over 70% on the first day.

This will deal a further blow to the travel and tourism sectors. But with firms eager to take advantage of workers being unable to return home, this drag could be more than offset by factories and construction sites being able to stay open longer.

A turning point for fiscal policy

Fiscal support ended 2020 on a strong note, with data published yesterday showing that the Q4 budget deficit was the second largest on record relative to trend GDP. (See Chart 1.)

This reflects a year-end rush to meet spending targets that were laid out in 2020’s budget. Fiscal expenditure rose 22% y/y in Q4, the fastest pace since early 2019. But this strength seems unlikely to carry over into 2021. There is far less urgency to support growth now than there was back when the 2020 budget was announced last May. In fact, with output now running above trend, policymakers appear to see little immediate need for fiscal support.

Chart 1: Budget Balance (% of trend GDP, SA)

Sources: CEIC, Markit, Bloomberg, Capital Economics

Borrowing quotas for local governments are only finalised at the National People’s Congress in March. But during the past couple of years, the central authorities have handed down preliminary quotas in advance to avoid delaying fiscal spending. So far there are no signs of that happening this year. There has been no new local government bond issuance this month, compared with RMB785bn in January 2020 and RMB369bn in January 2019.

Meanwhile, officials also confirmed this week that last year’s social security waivers, now estimated to have been worth around 1.5% of GDP, will not be repeated this year. And they have signalled that another round of special “anti-pandemic” sovereign bond issuance, which totalled 1% of GDP last year, is unlikely.

Coupled with the Finance Ministry’s stated aim of stabilising the government debt ratio following a jump in 2020, all of this points to a pull-back in deficit spending starting this quarter.

The week ahead

The PMIs are the key scheduled data release of the coming week. Meanwhile, we’ll be looking for any signs that the PBOC has decided to push back against the tightening in monetary conditions, and tracking the spring festival travel data too.

Data Previews

Manufacturing PMIs (Jan.) Sun. 31st Jan./ Mon. 1st Feb.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

“Official” PMI (31st Jan.)

09.00

51.9

51.5

51.5

Caixin/Markit PMI (1st Feb.)

09.45

53.0

52.6

52.5

Pace of industrial activity continues to ease

After climbing to multi-year highs in November, the manufacturing PMIs dropped back last month.

Early indicators suggest that this downward trend extended into January. There was an unexpected rise in the US, but the flash PMIs of China’s other major trading partners all fell, which might point to foreign demand levelling off. The new orders component of the Standard Chartered SME Confidence Index survey suggests that activity among SMEs may have softened in recent weeks. (See Chart 2.) And the pace of growth in industrial metals prices, which correlates well with factory activity in China, has slowed in recent weeks.

Chart 2: Manu. PMIs & SME Index – New Orders

Sources: CEIC, Markit, Bloomberg, Capital Economics

Non-manufacturing PMIs (Jan.) Sun. 31st Jan./ Wed. 3rd Feb.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

“Official” Non-man. PMI (31st Jan.)

09.00

55.7

55.0

55.0

Caixin/Markit Services PMI (3rd Feb.)

09.45

56.3

55.5

55.5

Services recovery appears to soften further

Both hard data and high frequency data for January suggest that momentum has continued to soften in recent weeks. Caution due to the virus flare-ups across several provinces probably weighed on the recovery in services activity.

Subway usage had levelled off below 2019 levels, hinting at some lingering nervousness about infection. As discussed above, renewed lockdowns and travel restrictions ahead of the Chinese New Year festivities mean that passenger traffic and tourism activity is unseasonably weak. Car sales have continued to fall back while growth in property sales remains broadly unchanged. (See Chart 3.)

We suspect that construction activity, which is included in the official PMI, has slowed. Housing starts are likely to have weakened in response to tougher restrictions on borrowing by developers. And the lack of any local government borrowing this year points to a weaker start to the year for fiscal spending.

Chart 3: Car & Property Sales (% m/m, seas. adj.)

Sources: Wind, Capital Economics

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (China)

Previous*

Median*

CE Forecasts*

January

Sun 31st

Chn

Official Manufacturing PMI (Jan.)

(09.45)

51.9

51.5

51.5

Chn

Official Non-manufacturing PMI (Jan.)

(09.45)

55.7

55.0

55.0

February

Mon 1st

Chn

Caixin Manufacturing PMI (Jan.)

(09.45)

53.0

52.6

52.5

Tue 2nd

HK

Retail Sales (Dec.)

(16.30)

(-4.0%)

(-17.0%)

Wed 3rd

Chn

Caixin Services PMI (Jan.)

(09.45)

56.3

55.5

55.5

Also expected during this period:

TBC

Chn

Current Account Balance – Preliminary (Q4)

Selected future data releases and events:

February

Sun 7th

Chn

Foreign Exchange Reserves (Jan.)

Wed 10th

Chn

Inflation Data (Jan.)

11th – 17th

Chn

Lunar New Year (National Holiday)

12th – 15th

HK

Lunar New Year (National Holiday)

Also expected during this period:

8th – 18th

Chn

Foreign Direct Investment (Jan.)

9th – 15th

Chn

Aggregate Financing “AFRE” (Jan.)

9th – 15th

Chn

Net New Lending (Jan.)

9th – 15th

Chn

M2 Money Supply (Jan.)

TBC

Chn

CBRC Data on Financial Institutions (Assets, Earnings, NPL) (Q4)

TBC

Chn

Job Openings to Job Seekers Ratio (Q4)

TBC

Chn

Trade Data (Jan.)

TBC

Chn

Vehicle Sales (Jan.)

Main Economic & Market Forecasts

%q/q annualised (%y/y), unless stated

Latest

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

2020e

2021f

2022f

Official GDP

(+6.5)*

(+21.0)

(+9.0)

(+7.0)

(+5.5)

(+5.0)

(+2.3)

(+10.0)

(+4.5)

GDP (CE CAP-derived estimates)

(+7.6)*

(+31.0)

(+10.0)

(+5.0)

(+2.5)

(+3.0)

(+1.0)

(+10.0)

(+3.5)

Consumer Prices

(+0.2)**

(+0.9)

(+1.8)

(+1.5)

(+1.4)

(+1.4)

(+2.5)

(+1.5)

(+1.5)

Producer Prices

(-0.4)**

(+1.0)

(+2.5)

(+2.0)

(+1.5)

(+1.3)

(-1.8)

(+2.0)

(+0.5)

Broad Credit (AFRE)

(+13.1)**

(+12.0)

(+11.0)

(+10.0)

(+9.0)

(+8.0)

(+13.3)

(+9.0)

(+7.5)

Exports (US$)

(+18.1)**

(+27.0)

(+14.0)

(+2.0)

(+3.0)

(-2.0)

(+3.6)

(+10.0)

(+1.5)

Imports (US$)

(+6.5)**

(+17.5)

(+22.5)

(+12.5)

(+8.0)

(+7.0)

(-1.1)

(+15.0)

(+6.0)

RMB/$

6.45

6.40

6.30

6.20

6.20

6.20

6.54

6.20

6.20

7-day PBOC reverse repo %

2.20

2.30

2.40

2.50

2.50

2.50

2.20

2.50

2.50

1-year Loan Prime Rate (LPR) %

3.85

3.95

4.05

4.15

4.15

4.15

3.85

4.15

4.15

1-year MLF Rate %

2.95

3.05

3.15

3.25

3.25

3.25

2.95

3.25

3.25

10-year Government Bond Yield %

3.19

3.20

3.10

3.00

2.80

2.70

3.20

2.80

2.60

RRR (major banks) %

12.5

12.5

12.5

12.5

12.5

12.5

12.5

12.5

12.0

CSI 300 Index

5,377

5,550

5,600

5,650

5,700

5,825

5,211

5,700

6,200

Hong Kong GDP

(-3.0)*

(+3.0)

(+5.5)

(+4.5)

(+6.5)

(+5.5)

(-6.1)

(+5.5)

(+5.0)

Hang Seng Index

28,551

29,000

29,400

29,800

30,250

31,200

27,231

30,250

34,000

Sources: Bloomberg, CEIC, Capital Economics *Q4; **Dec.; End of period


Julian Evans-Pritchard, Senior China Economist, julian.evans-pritchard@capitaleconomics.com
Sheana Yue, Assistant Economist, sheana.yue@capitaleconomics.com