This is a hot topic especially after China released weak trade figures yesterday. Obviously, one can always argue that a stimulus at some point is necessary to turn around the market expectation and boost confidence. The Ministry of Finance also posted a statement on its website yesterday afternoon, and said that the fiscal policy will be more "proactive".



In fact, China's fiscal policy is already quite proactive so far, fiscal spending in the first seven months of this year grew 13.4% y/y, significantly higher than the growth target of 10.6%. In the meantime, China will issue CNY3.8trn local government bonds this year, while the outstanding volume of local government bonds was only trn by the end of last year. China's M2 growth has exceeded 13% since July, also one notch higher than the annual growth target of 12.0%.



"Given the sluggishness of the economic data and soft sentiment in the private sector, China will definitely speed up the fiscal spending in the upcoming months. The question is how big the increased spending will be? An increase of CNY1trn in fiscal spending will accelerate the GDP growth by 1.5ppt, but will also likely increase the fiscal deficit/GDP ratio to around 4% (the government target for this year is 2.3%)", says Commerzbank.



That said, the most likely approach is to encourage private investment by providing fiscal support. From this perspective, the government could be keener to push forward so call "Public-Private-Partnership" (PPP) programme. Of course, the monetary policy will be more accommodative in tandem, i.e. more cuts in interest rates and RRR can be expected.



The credit and M2 growth will provide a good gauge of China's stimulus package, if there is. To a large extend, if M2 growth exceeds 15% (the latest reading was 13.3% for July), it could reflect a strong commitment to boost the growth.



"The other question is will CNY weaken further if the money supply picks up rapidly? Possibly! But in the near term, the central bank will continue to intervene into the market to stabilize the currency. While it looks self-defeating and unsustainable, China will argue that it is crucial to maintain the financial stability amid economic slowdown", added Commerzbank.