China's policies far from unconventional

China's economic growth in the first quarter of 2015 was 7 percent year-on-year, the slowest since 2009, while investment grew only 2.8 percent, becoming the main drag on the economy. New jobs created in the first quarter added up to 3.24 million, 0.2 million less than the same period last year, and both the manufacturing and non-manufacturing purchasing managers indexes (PMIs) stayed below 50, suggesting reduced use of labour. The GDP deflator dropped into negative territory (-1.1 percent), implying the current growth rate is below potential. In other words, there is a negative output gap.

House sales slid 9 percent year-on-year, housing inventory rose 25 percent, while revenue from government land sales fell 36 percent. The sharp drop in land-sale revenue, along with tighter control of local government debt, will likely dampen infrastructure investment for the rest of the year. High-frequency data, such as new order indexes (as part of PMI), suggest the growth downturn has not run its course yet. And we (at Standard Chartered) forecast that GDP growth could fall further to 6.7 percent in the second quarter. We thus expect the government to take four-pronged easing policies in the next few months to reduce growth risks.

First, the 2015 budget suggests a nearly 1 percentage point increase in the deficit/GDP ratio. This year's approved budget deficit is 2.3 percent of GDP, compared with 2.1 for in 2014. Our estimate suggests the budgeted deficit for this year will be 2.7 percent of GDP, which means the official budget leaves room for fiscal policy to be more proactive. But the extra-budgetary deficit is likely to decline due to stricter control of local government debt, and the more expansionary official budget will be offset by a tighter extra-budgetary stance. So the overall fiscal stance is likely to be neutral or slightly supportive.