Faced with a stronger than expected soft landing – GDP grew by 8.1% year-on-year in the first quarter- mainly due to a drop in exports to the EU and the US, Beijing has taken several measures to stimulate the economy and boost consumption. Monetary policy has been loosened, with cuts in bank reserve requirements and a first noteworthy cut in interest rates (to 6.31%) since 2008, whereas tax breaks, subsidies and increased loans to large infrastructure and energy projects – many of which had been postponed- have now been announced.

Impact on country risk

In a year of a landmark political transition, the focus on growth is all but surprising. Beijing has enough room for manoeuvre given a favourable budget position and annual inflation brought down from 6 to 3%. More policy relaxing might come in coming months. It seems that Beijing is cautious not to repeat the same excesses as with the 2009-2010 massive stimulus package, notably in limiting bank credit volumes and avoiding further increases in local government debts. Nevertheless, the fear is that public spending and investments will somewhat exacerbate the situation in overcapacity sectors and that the authorities will eventually reboost the sizeable property market for a short period. For the future, a crucial issue will be the impact on future growth of a potential prolonged drop in demand from advanced countries. This should translate into lower average growth in the medium term, closer to 8%, as the official goal of economic rebalancing from investments to domestic consumption will take a long time and have also uncertain social consequences.

Analyst: Raphaël Cecchi, r.cecchi@credendogroup.com