China Special January 2019


China: Authorities set to boost fiscal and monetary stimulus in efforts to rekindle economic growth

January 18, 2019

Chinese authorities will implement further fiscal and monetary measures this year to tackle cooling domestic growth and spillovers from the ongoing trade war with the U.S. On 19–21 December, China’s top leadership met in Beijing at the annual Central Economic Work Conference (CEWC), which sets the tone of economic policies for the year.

The top leadership emphasized that they will use “counter-cycle” macro policies to stabilize aggregate demand. On the fiscal side, the government will increase funding for new infrastructure projects at local levels, including technological upgrade, mainly through the issuance of special bonds. Leaders at the CEWC vowed to implement “a larger scale of tax and fee cuts” on top of the already-enacted salary tax reform, which came into effect on 1 January. The government is also considering to partially subsidize purchases of items such as cars and home appliances in order to boost domestic consumer spending. Moreover, companies are expected to benefit from export tax rebates and VAT cuts.

While policymakers decided to keep the “prudent” monetary policy "neither too tight nor too loose", they also guaranteed abundant liquidity. In this regard, the People’s Bank of China (PBOC) announced on 20 December the creation of a new lending instrument, the Targeted Medium-Term Lending Facility, which aims to lower borrowing costs for private companies and small- and medium-sized enterprises (SMEs). Early in January, the PBOC cut the reserve requirement ratios for lenders, releasing around USD 117 billion, while it continued to aggressively inject funds into the financial system in recent weeks.

Government officials at the CEWC also called for reform to taxation, the financial sector, land, market access and social management. Regarding state-owned enterprises (SOEs), there were calls to accelerate the mixed-ownership scheme. Meanwhile, in a wink to the United States, officials promised to make progress on opening up its economy, ease market access and protect the interests of foreign companies in China, especially intellectual property rights.

Although the full set of economic targets will be disclosed at the March National People’s Congress, Chinese authorities are clearly opting for further policy easing in order to shore up economic growth. This viewpoint is summarized by Tao Wang, chief China economist at UBS:

“We expect the government to lower the 2019 growth target to 6-6.5% or around 6%. Our forecast for China’s GDP growth is 6.1% for 2019 as policy easing partially offset downward pressures.”

Iris Pang, economist for Greater China at ING, however, warns that:

“The direct and clear direction on fiscal stimulus and loosening of monetary policy indicates the top risk for the economy is the ongoing trade war with the US, and this is something we agree with. However, the stimulus and the loosening credits to private enterprises and SMEs means that China is piling up debt again. and will undo its efforts to clean up debts in 2015-2017. Re-leveraging is the answer for 2019 to support pro-growth measures.”


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