Pls see attached the full PDF research report, below is a highlight:
Highlights: Accelerated economic downturn forced the Chinese government to change its policy stance. According to media reports, China’s power generation volume and fiscal revenue may have declined YoY in October, for the first time since 1998 and 1996, respectively, while the October PMI index is the lowest since 2005. All these “firsts” indicate an acceleration of economic deterioration and confirm our view that the Chinese economy faces much greater challenges now than in 1998. On this evidence, we lower our GDP growth forecast to 8% for 4Q08 and 9.3% for FY08. To deal with these challenges, the State Council announced over the weekend that it would adopt expansionary fiscal and "moderately loose" monetary policies. The “moderately loose” monetary policy is a new stance, consistent with our expectation that monetary policy responses would be quicker and more aggressive than in the past. We reiterate our view that China may cut interests rate by another 216bp and cut the RRR by 350~550bp by the end of 2009, with the size of each IR cut larger than 27bp. If the Rmb4 trillion package is fully funded by the government, we estimate it may boost 2009 GDP growth by 1.8ppt. The government’s expansionary fiscal program needs about Rmb4 trillion investment by the end of 2010, focusing on four key areas: people’s livelihoods (low-income housing, healthcare, education), infrastructure (rural infrastructure, railway, highway, airport), environmental protection (ecological development, water treatment), and post-disaster reconstruction. Assuming that the Rmb4 trillion in investment comes fully from the government (though to date this is unclear), annual government spending would be Rmb2 trillion over the next two years, or about Rmb560bn more than 2008 government investment. This should boost GDP growth by 1.8ppt, cushion the economic slump, and also help absorb overcapacity in raw material sectors. It will be impossible to quantify the exact effect of this until the government announces the size of the bond issue and fiscal budgets. ftoehQoX.rar (170.46 KB)
ftoehQoX.rar (170.46 KB)