China’s slow stimulus rollout is adding to concerns about the weakening economy and fueling a debate over how far authorities will go to bolster growth.
Investors were primed for the State Council, China’s cabinet, to possibly announce new support measures for the economy after a meeting on Friday. Market expectations were especially heightened after the central bank’s surprise interest rate cut last week, which economists said signaled a shift to looser policy.
The State Council, however, stopped short of releasing any specific proposals, saying the government is studying new measures that will be adopted in a “timely manner.” Premier Li Qiang, who heads the council, is also making his first official trip overseas this week, to Germany and France, suggesting an announcement on stimulus may not be imminent.
Economists are tempering expectations, saying any support will be limited. Goldman Sachs Group — which has cut its forecast for China’s growth this year to 5.4% from 6% — says Beijing is more constrained now because of a shrinking population, elevated debt levels and President Xi Jinping’s call for curbing property speculation. That means any stimulus package will be smaller in scope than in previous downturns, where authorities boosted investment in infrastructure and real estate as a way to stimulate growth.
Property and infrastructure stimulus will probably be “targeted and moderate,” Goldman’s economists including Hui Shan said in a report Sunday. “Going down the same old route of using property and infrastructure to engineer a strong economic rebound would be inconsistent with the type of ‘high-quality growth’ that the leadership has been emphasizing repeatedly,” they said.
Chinese stocks fell on Monday, partly due to traders’ disappointment about the State Council’s statement. The CSI 300 Index dropped as much as 1%. Steven Leung, executive director of UOB Kay Hian in Hong Kong, said there was “profit-taking as government policy expectations were overdone.”
The State Council, which co-ordinates policy among central government ministries and the central bank, called for “more forceful” policies to bolster the economy. It didn’t release a timeline or details of the support measures under discussion.
Economists have speculated that the stimulus steps could include fiscal measures to boost infrastructure, such as an increase in the bond quota for local governments, more funding from state policy banks and the sale of central government special-purpose bonds.
Property-easing measures are also under discussion, according to people familiar with the matter, including possibly reducing mortgage rates and relaxing purchase restrictions. In addition, officials have hinted at targeted measures to boost consumption of cars and home appliances.
Several major banks have downgraded their growth forecasts for China recently following weak economic data for May. Nomura Holdings Inc. predicts 5.1% expansion, UBS AG is forecasting 5.2%, while Standard Chartered Plc is predicting 5.4%.
Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd., expects local governments to speed up the sale of special bonds, which are mainly used to finance infrastructure projects. Local regions will also likely further ease property policies, he said.
“There is a pressing need to spur growth,” said Yeung. “It is now the ministries, local governments and state-owned enterprises to do the job” of promoting growth, he said.
Goldman economists don’t expect the central government to issue special sovereign bonds, saying this tool has only been used three times in the past during particularly difficult periods, including when the pandemic first began in 2020 and during the Asian Financial Crisis in 1998.
The government is also unlikely to launch another round of shantytown redevelopment like it did in 2015, the economists said. During that time, the central bank injected cash into the property market to pay for urban renewal and also compensate households whose homes were demolished as part of the program, resulting in a surge in property prices and sales.
This time around, the government may accelerate the issuance of local government special bonds, and continue to ease property policies, including lowering down-payment requirements, cutting mortgage interest rates and removing purchase restrictions in top-tier cities, the Goldman analysts said.
Officials are also supporting industries considered as new growth drivers of the economy, such as high-end manufacturing and new energy vehicles. The People’s Bank of China will likely also cut interest rates again this year and reduce the reserve requirement ratio for banks, they said.
© 2023 Bloomberg
