China Economic Comment: Shift in consumption policy stance; waiting for overall policy change

Research evidence excerpt

China Economic Comment: Shift in consumption policy stance; waiting for overall policy change

tuation now. There is no clear indication of

such a decisive change yet. Different ministries such as the NDRC and MOF announced

they recently held policy consultation meetings with experts from different fields. But we

believe the order to move needs to come from the top leadership, not ministers. The top

leadership has started to inspect local conditions. We believe news on this deserves the

highest level of attention.

Month-to-date, the PBOC has withdrawn over RMB700bn of liquidity via OMOs.

Interbank rates have been on a steady upward trend from the start of the month. The

steadiness of the rise in interbank rate indicates the rise has been tightly managed

instead of driven by exogenous shocks. The rise cannot be attributed to the quarter-end

effect, in our view, since it started early in the month. This has been a surprise to us given

weak activity and loan growth as well as low CPI inflation. Higher rates will not help

activity and credit growth. We believe more administrative policy supports are needed to

just keep activity and loan growth stable. We believe the authorities may take enough

administrative measures to generate a rise in activity and loan growth despite the rise in

rate. Interbank rate is likely to fall after the end of the quarter but it may not fall

back to the April-May level.

Data:

EPMI data fell modestly after seasonal adjustment. EPMI represents the strong

parts of IP with new industries. Think of it more as a proxy of the upper arm of the K in

industrial sector. The relationship between EPMI and IP or hi-tech IP data has been poor.

The recent moderation is of course not good news. We still expect the official hard