China: Recovery even without growth target
• The Chinese government abandoned its target for gross domes-tic product (GDP) in 2020, focusing instead on stabilisation of the job market. A proactive fiscal stance will provide support.
• Continued policy easing will help the economy to get back on track. We continue to expect that the Chinese economy will be able to reach its pre-crisis output levels by the end of the year.
At the opening session of the National People’s Congress, Premier Li Keqiang presented the economic and policy targets for 2020. As widely expected, for the first time in many years, the Chinese government has abandoned its annual GDP growth tar-get for the current year, given the huge domestic and external uncertainties. After the worst hit to the Chinese economy in decades, the decision to deemphasise growth signals that this time the government is not ready to push growth at any price. Instead, it is focusing on stabilisation of the job market. This suggests that the authorities are likely to continue their gradual and targeted policy easing going forward.
The government is signalling a proactive fiscal policy stance by raising the fiscal deficit target from 2.8% (in 2019) to above 3.6% of GDP, which is in line with expectations. The quota for local government special bonds (LGSBs) was raised from RMB2.15trn (in 2019) to RMB3.75trn, and a quota of RMB1trn of central government special bonds (CGSBs) was introduced. The proceeds from the CGSBs will all be transferred to local governments and should be used for employment creation and the support of households and businesses. The higher quota for LGSBs will likely provide a boost to infrastructure investments.
New infrastructure will be a priority, including 5G, ultra-high voltage electricity transmission, artificial intelligence and new energy-vehicle charging stations. Despite the focus on new infrastructure, traditional infrastructure projects will remain a major driver of investment growth, as they are generally more capital and labour intensive. New urbanisation initiatives will be another priority, focusing on the renovation of old residential communities. Overall, the government maintains its hawkish stance on the property sector, reiterating that “houses are for living in, not for speculation”. However, it highlights the importance of ‘city-specific policies’, implying that adjustments at the local levels will likely continue, but we cannot expect any nationwide property stimulus this year.
On the monetary policy side, policymakers pledged that their prudent monetary policy stance will become more flexible. The government wants to increase money creation and total social financing significantly above their 2019 growth levels. It also lifted the target for consumer price inflation to 3.5%, providing more room for monetary easing ahead. We can expect further cuts in bank reserve requirement ratios and interest rates as well as increased relending in support of the real economy.
Overall, the targets are decent and realistic, and continued policy easing will help the economy to get back on track. We continue to expect that the Chinese economy will be able to reach its pre-crisis output levels by the end of the year.
Sophie Altermatt, Economist, Julius Baer
Commodities
New oil: Supply glut fears take a back seat
Fears about an overflowing oil market have taken a back seat. Signs of rebounding demand and materialising supply cuts add fuel to the oil price rally. Given the more positive fundamental outlook, we lift our 3-month oil price forecast to USD 40 per barrel. We stick to our long position as sentiment likely continues to support oil prices in the very near term, but add a stop-loss just below today’s oil price levels.
The oil market regained confidence much faster than anticipated. Production shut-ins in North America and the Middle East, combined with signs of swiftly recovering oil demand, pushed fears about an overflowing oil market to the back seat. The market mood has recovered to lightly bullish levels when considering the speculative futures positions in the North American West Texas Intermediate contracts. As usual, the official US statistics provide the timeliest glimpse at the oil market fundamentals. Given the easing of lockdown measures and given the massive drilling freeze, which will fully pressure output only by late May and early June, this data could in fact show declining oil storage going forward.
Support from sentiment could soon exhaust, but signs of declining storage would add more fuel to the oil price rally in the very near term. That said, with prices moving beyond USD 35 per barrel, the shale-versus-sheikh debate and the question about market shares post the corona crisis becomes a talking point much earlier than expected. Current oil price levels should revive parts of the shale business. Reflecting the improvement in fundamen-tals on the back of swiftly recovering oil demand, particularly road fuel use and materialising supply cuts, we lift our 3-month oil price forecast to USD 40 per barrel. A potential second pandemic wave and its impact on sentiment and the economy remains a key risk element and continues to heighten the uncertainty. With regard to our long oil position, we implement a stop-loss level at USD 35 per barrel.
Norbert Rücker, Head Economics and Next Generation Research, Julius Baer
