China’s economy is on the mend, as its fiscal and monetary policy efforts are starting to take effect.
China was aiming for growth of 6.5% to 7% this year, and “we’re on track for that,” says Kenrick Leung, director of investment for Greater China Equities at Amundi in Hong Kong. He manages the Renaissance China Plus Fund. “If you look at the economy since the end of the first quarter, things have started to pick up.”
The reasons for this are liquidity and pent-up demand, says Leung, who adds, “We’ve just gone through the earnings period in Hong Kong, and a lot of the companies have actually beat expectations on revenue.”
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But while authorities have been able to stabilize the economy in the short-to-medium-term, there will still be challenges over the long term. Says Leung, “We still have a lot of issues that need to be resolved in terms of deleveraging and cleaning out the banking system.”
Since the beginning of this year, Leung adds, China has been more focused on its fiscal policy. For instance, China had a fiscal deficit amounting to 2.3% of GDP last year. This year, the target is north of 3%, “[meaning] fiscal policy is the big driver of some of China’s growth. Monetary policy has taken a bit of a backseat.”
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Looking at infrastructure build, Leung notes, “There’s a fine line between building infrastructure and controlling the supply-side discipline.” To that end, China is taking measured steps, including lowering taxes for auto consumption to boost larger supply of consumer goods at lower prices.
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“Once again, a lot of [this] is stimulus measures on the fiscal or administrative side that have galvanized stability,” says Leung.
There’s also ample liquidity within the domestic system, he explains. “But authorities are very cognizant of how monetary policy can impact the renminbi —any drawdown can affect reserves. So, [authorities] have put a break on monetary policy, and a floor under growth on the fiscal side.”