Growth Deleveraging: Fiscal and monetary expansion to support growth

Here it goes again. Against very clear headwinds due to the trade war and decelerating investment, China's State Council has unveiled plans to take a more aggressive fiscal policy in 2018 on reducing corporate and household burden. This action is echoed by the People's Bank of China ( PBoC ) with an extended value of the medium-term lending facility (MLF) beyond the earlier three cut s in the Reserve Requirement Ratio (RRR) . Chinese banks will also have a laxer “structural parameter” in the Macro Prudential Assessment (MPA), implying more room for credit growth. The duo fiscal and monetary policies send a clear signal that growth is the priority. A n expansionary fiscal policy and a reduction in tax r evenue mean stronger government intention to support the economy. But without facilitating measures, the new fiscal package will have to drive up interest rate and crowd out private investment. This is where monetary policy comes into place. There are two consequences of the changed monetary tones. First, a faster credit growth can maintain abundant liquidity and low interest rate to support private sector. Second, laxer monetary condition can ease the default risks due to liquidity crunch, which is particularly important against the backdrop of the recent crack down on shadow banking. The reduced risk appetite of investors and the concern on more defaults also push the PBoC to include lower rated assets as the collaterals of the MLF. While total social financing seems to have stabilized so far, down the road, we expect it to accelerate in the second half of 2018 as a consequence of the RRR cut s and the MLF expansion. All of this is necessary to avoid higher rates making it even more difficult to finance the fiscal stimulus and to reduc e the crowd ing out of private investment. All in all, China has opted for a renewed fiscal and monetary stimulus to address the risk of the US-led trade war. Forget about deleveraging efforts for the time being.