China’s Policy Tightening Won’t Impact Growth Beyond Short Term: Goldman Sachs

The recent policy tightening initiatives from China’s officials through the reining in of housing prices, will impact the country’s growth only for the short term, as policymakers prepare to prioritize stability and growth ahead of leadership changes next year, states analysts at Goldman Sachs. Andrew Tilton argues in his December 14 research note titled “Asia Views: Reflation, depreciation, and demonetization” that Japan turns out to be the biggest beneficiary of the reflation trade.

China’s infrastructure spending clocks 15% to 20% expansion

Tilton highlights that thanks to better PMIs in the larger part of Asia and the world, the economic trend points toward reflation. He points out that such a trend can be evidenced from the GS Global Leading Indicator, which touched a six-year high last month. To reinforce his point, Tilton adds that policies in key developed markets have also been shifting toward a more supportive direction:

The GS analyst believes the trends toward a reflationary shift could be further accentuated on the back of policy changes from Donald Trump. He believes Trump’s policies will have impacts across Asia, based on each economy’s sensitivity to higher U.S. rates and potential protectionist measures. The analyst notes that Trump’s victory offered a catalyst for rates markets to catch up to fundamentals. Using data from Asia’s smaller open economies such as Korea, Thailand, Taiwan, and Malaysia, he illustrates that such economies would benefit from better global growth, as they are exposed to higher rates and a substantial increase in trade barriers.

Tilton believes Chinese policymakers’ extended round of fiscal and credit stimulus measures have yielded results. This is evident from growth in infrastructure spending posting 15% to 20% annualized expansion, with the real GDP growth largely on target.

Recently, Goldman Sachs argued in another report that credit stimulus measures by China’s authorities could last for four or five years if they are coupled with proper infrastructure plans.

Japan would benefit from reflation trade

Singling out Japan as the biggest beneficiary of the reflation trade, Tilton believes the country would benefit from positive growth and an inflation shock from the rest of the world. He points out that though Japan has been struggling to pull inflation higher, its inflation is set to move back into positive territory in that coming months.

Tilton terms India’s recent demonetization efforts as the most fascinating event that has unfolded in the region. However, he argues that the demonetization initiative turned out to be like “changing oil while driving at full speed on a freeway.” Accordingly, Tilton trimmed his near term growth forecast for India sharply to 4% yoy for the current quarter. The analyst concedes that his lower forecast is much sharper than the modest forecast painted by others from the analyst community. The following chart highlights how India’s composite PMI dropped sharply last month after the demonetization announcement was made by the Indian government: