Introducing The 'Li Keqiang Put'
Market economists expect the government to announce an annual growth rate of anywhere between 7.3% and 7.8%, with the median estimate at 7.5%.
With a forecast of 7.6% year-over-year GDP growth in the Q2, BofA Merrill Lynch economist Ting Lu is relatively bullish on China.
In a note to clients today, he asserts that the country benefits from what he calls the "Li Keqiang put," arguing that the new Chinese premier will be unwilling to let growth slip below the government's official target of 7.5%.
If the "Li Keqiang put" does exist, then it's probably good news for global markets, which have been roiled in recent months in part thanks to concerns over a slowdown in China, one of the world's largest economies.
Ting Lu writes:
Now we have the “Li Keqiang Put”
We believe Premier Li Keqiang’s latest vow to prevent growth from slipping below a certain “floor” finally convinced fragile markets that his new government still values growth stability and will employ a gradualist approach instead of a reckless “kitchen sinking” or “shock therapy” approach to solving many of China’s problems. We believe we can term this temporary policy approach the “Li Keqiang Put”, meaning Li’s government will try to prevent a growth hard-landing and a financial crisis. For the markets, we believe an asset price crash due to panic on China’s growth and financial stability would present a good buying opportunity.
Too early to define “Liqonomics”
In contrast to the newly coined “Liqonomics” which describes Li’s policy framework as no stimulus, deleveraging and structural reforms, we believe Mr. Li will not be afraid to use limited fiscal stimulus to deliver stable growth. He will likely employ a “Loose fiscal, tight monetary” approach by leveraging up the central government and deleveraging local governments. We believe Mr. Li is a reformer by nature, but we will have to be patient while he builds his team and figures out his actionable reform plans. What he can deliver on reforms in the near term is quite uncertain, so optimists in this regard could be disappointed.
Why we still have a “Li Keqiang Put”
First, we think Mr. Li needs a stable growth environment to consolidate his power base, as a growth hard landing or financial chaos could make people think he has no effective control of the government and lacks the capacity to deliver a stable economy. Second, Mr. Li also needs to buy time to draw his reform plans. Third, as Mr. Li just took office, he may not be confident enough yet to use a “shock therapy” approach to start reforms. Finally, we believe the government still has the ability to arrest a slump in growth thanks to China's high savings, capital control, low foreign debt and high FX reserves.
What will Premier Li do in 2H13?
Investors have been asking the following questions. First, where is the floor? Second, what if the government does take any measure to stabilize growth? Third, what should the market expect? We believe the growth floor for this year is 7.5% and could be lowered to 7.0% in 2014. We expect Mr. Li to employ a unique “loose fiscal, tight monetary” framework with a limited fiscal expansionary policy equivalent to RMB150bn in 2H13 (30bp of annual GDP, incremental spending plus tax incentives). Fiscal spending will likely be focused on social housing, railway and urban infrastructure projects. Mr. Li may also introduce tax incentives and subsidies to encourage upgrading of factory equipment, broadband and 4G networks. We expect no more RMB/USD appreciation in 2H13. We are comfortable with our annual GDP growth forecast at 7.6% for both 2013 and 2014 despite a recent round of downward growth revisions on the Street.
On the other hand, Chinese finance minister Lou Jiwei said today that the government may be willing to let growth slow below 7% in the second half of the year.