China: From demand-side to supply-side policy – ING

Tim Condon, Chief Economist at ING, suggests that in China demand-side stimulus was needed to halt the growth slowdown but it probably overshot and supply-side reforms now are the main direction.

Key Quotes

“The bond market is under stress. The Economic Information Daily reported yesterday that CNY1.66trn of bonds mature this month of which 70% are high-yield. In a separate but related story, Shanxi province pledged to guarantee the bonds of seven coal companies. The coupon default by one of them in early April contributed to the spike in credit spreads, contagion from which spread to government bond yields.

Shanxi is coal country and as such is a front-line province for supply side structural reforms. The lesson from Trumpsanders is that provincial support like Shanxi’s bond guarantee and central government support are needed to prevent supply side structural reforms from becoming politically toxic.

We believe the consensus view of the recent People’s Daily “authoritative voice” interview and the follow-up publication of the speech President Xi gave in January on supply-side reforms is that it reflects divisions at the top level of policymaking. Supporters of the view see the authoritative voice’s answer to the question about whether there would be more demand-side stimulus given its success in boosting first-quarter economic performance as implicit criticism of the State Council.”