Measures expected to boost economy
13 Jul 2022


Stimulus policies will greatly benefit industry and consumers alike, analysts predict


China's economy will likely rebound in the second half of this year with the help of a package of stimulus measures designed to prop up growth, according to economists and analysts.


They said that the economy is gradually recovering from a slowdown caused by a series of COVID-19 outbreaks since March, and that the country has the tools and the ability to step up policy support to aid recovery. They also said that they expect to see improvements in some major economic indicators, like industrial output and consumption, in the coming months, as a result of better epidemic containment and stronger policy support.


The State Council, China's Cabinet, recently unveiled 33 measures promoting fiscal, financial, investment, consumption and industrial policies to jolt the economy.


They include larger scale value-added tax credit refunds, speeding up the issuance of special local government bonds and increasing financial support for infrastructure and major projects.


Tommy Wu, lead economist at Oxford-based independent global advisory firm Oxford Economics, said that his team believes China's economy is beginning to recover following the lifting of COVID restrictions in Shanghai on June 1 and the rolling out of strong stimulus measures to shore up growth, and that they expect to see a stimulus-driven recovery in the second half of the year.


Wu added that infrastructure investment is the best way to boost development.


"Even if some cities or rural areas have been affected by COVID outbreaks, projects in other areas could continue," he said. "The government is aiming to spend the proceeds of special local government bonds by the end of August. State-owned policy banks will also expand credit to support infrastructure projects."


To roll out further stimulus packages in the second half of the year, Wu said China's government will probably need to find other ways to raise additional funding, such as by issuing special sovereign bonds, as it did in 2020.


He cited real estate as one industry that could benefit. Measures such as one encouraging the delayed repayment of housing loans, coupled with recent mortgage rate cuts could help stabilize the residential property market.


"However we don't think it will become a significant growth driver this time around, as authorities will likely keep most of the important curbs in place to contain the real estate sector's leverage," he added.


Meanwhile, VAT rebates will help companies stay afloat and support the economic recovery when business conditions start to improve more visibly.


Wu said stimulus measures to boost consumption, such as a policy reducing sales tax on cars, will be useful to some extent, but effectiveness will be constrained by the extent of mobility restrictions and income prospects.


"Consumer sentiment is unlikely to turn sanguine as the risks of sporadic COVID outbreaks and reimposed restrictions in small neighborhoods remain high. Weak employment and income prospects are also weighing on consumption," he said.


Regarding financial measures, Wu said efforts toward monetary easing-in which a central bank lowers interest rates to make credit more accessible-will likely be made to support small and medium-sized enterprises, the manufacturing and real estate sectors, and infrastructure financing.


"Still, we think there is room for the People's Bank of China, China's central bank, to lower market interest rates and loan prime rates, and have one more rate cut in the third quarter, as a broad-based monetary easement through rate reductions could be effective in boosting growth after the economy stabilizes and could stimulate credit demand," Wu said. "But we don't expect additional cuts afterward, as the policy divergence with the United States and renminbi weakness will act as a constraint."


Chen Jia, a researcher at the International Monetary Institute at the Renmin University of China, spoke highly of the government's stimulus policy measures, saying the improvement in recent indicators has proved their effectiveness.


An official survey taken recently showed an improvement in both manufacturing and services. The official Purchasing Managers' Index for the manufacturing sector rose to 50.2 from 49.6 in May, returning above the 50-point mark that separates expansion from contraction, and according to the National Bureau of Statistics, official services PMI came in at 54.3, compared with 47.1 in May.


Another private-sector survey, which focused on small and export-oriented businesses, also showed an improvement in China's economic activity in June.


Media group Caixin said that its composite PMI, which includes both manufacturing and services activity, rose sharply to 55.3 in June from 42.2 in May.


Chen said he takes a rosy view of China's growth in the second half of the year and that he expects the country to experience accelerated economic recovery, with growth ending the year at over 4 percent.


Despite the challenge posed by rising consumer inflation, due in large part to the recent pork price rally, experts said the country still has plenty of room to adjust its policies.


Last month, China's factory-gate inflation rose at its slowest rate since March 2021 with the help of effective government measures to resume work and production, stabilize key industrial and supply chains and ensure stable supplies and prices, leaving room for further stimulus policy measures to shore up growth.


China's producer price index, which gauges factory-gate prices, rose 6.1 percent year-on-year last month, following a 6.4 percent increase in May, the National Bureau of Statistics said on Saturday, and the consumer price index, the main gauge of inflation, rose 2.5 percent year-on-year last month, compared with a 2.1 percent rise in May.


In fact, compared with soaring prices in some other major economies, China's overall price level is generally stable. Inflation hit a new 40-year high in May in the US, where CPI rose 8.6 percent year-on-year, official data showed.


Wen Bin, chief economist at the China Minsheng Bank, said his team expects CPI inflation to rise slightly and PPI inflation to decline in the second half of the year, meaning inflation will not put significant pressure on China's monetary policy easing.

Source: China Daily