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China Special March 2019

China: Authorities unveil further policy stimulus to rekindle economic growth

The coronavirus outbreak decimated economic activity in China at the start of the year, with most indicators recording record lows in January–February. However, boding well for the economy ahead, the health situation has significantly improved since, after the Chinese authorities locked down 60 million people in Hubei province and imposed outdoor restrictions across most of the country. In fact, in recent days the new confirmed cases in China were imported from overseas, according to the country’s National Health Commission. Nevertheless, the new cases are mostly from Chinese expatriates returning to the country as the pandemic spreads across Europe and the United States, which has sparked fears of a second wave.

The policy response has been rather moderate to date compared to that implemented in the wake of the Global Financial Crisis in 2008. The People’s Bank of China cut some key policy rates in mid-February, while it also reduced the reserve requirement ratio for selected banks on 13 March. In this regard, analysts expect that the PBOC will likely ease its monetary policy.

Iris Pang, Greater China economist at ING, noted that her baseline scenario includes:

“A deferred rate cut of 10bps in April (we expected it in March) as a targeted RRR cut suppressed interbank rates, which will reduce banks’ interest expense if they lend out more inclusive finance. Further targeted RRR cuts in April or May are possible if global demand continues to weaken.”

Meanwhile, Ting Lu, Lisheng Wang and Jing Wang, economists at Nomura, stated:

“We expect more financial relief and monetary/credit easing measures in coming months, including further liquidity injections through channels such as the MLF, TMLF and RRR cuts, more rate cuts, using lending facilities such as PSL to fund loan extensions and reductions in interest payments. With rate cuts across the world, the PBoC has more room to cut rates. Specifically, we expect the PBoC to cut the 1yr benchmark deposit rate and 1yr MLF rate each by 25bp in coming weeks in our base case.”

In terms of fiscal policy, the measures adopted included tax reliefs, reduction in VAT for small- and medium-sized enterprises, among others. Collectively, the measures amount to CNY 1.25 trillion (around 1% of GDP). Further fiscal stimulus could be in the pipeline as suggested by Yi David Wang, head of China economics at Credit Suisse:

“On the policy front, we repeat our view that China will likely implement a stimulus package amounting to 2.5-3.5% of nominal GDP. […] We also anticipate more fiscal support for SMEs and households (e.g., unemployment benefits, subsidy for low-income individuals, possibly direct tax rebates).”

However, some analysts warn that Chinese authorities have limited policy space. Analysts at Nomura, for example, comment that the stimulus plan is constrained in two ways:

“First, COVID-19 represents both a supply and a demand shock, and conventional policy efforts to stimulate demand may not work effectively in such a unique situation. Second, surging debt (including foreign debt), a much lower return on capital, the smaller current account surplus and falling FX reserves (as a consequence of several rounds of massive stimulus over the past two decades) are all factors constraining Beijing’s available policy space.”

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