Economic measures by Beijing will not bring results overnight
- The restocking of the banks’ liquidity with the release of frozen deposits is just a first step towards guiding the economy through the year ahead
It has not taken Beijing long into the new year to begin executing a strategy mapped out late last month for keeping China’s economy on track amid the headwinds of the United States trade war and slowing domestic growth. Two cuts of 0.5 per cent this month in the proportion of deposits that banks are required to set aside as reserves will pump 1.5 trillion yuan (US$218 billion) into the banking system for lending to state and private companies. The announcement on Friday comes after Beijing fast tracked approval and allocation of the issue of local government bonds worth 1.39 trillion yuan so authorities can step up lending for infrastructure projects.
The plan, approved by senior leaders at the Central Economic Work Conference, set the course for the world’s second biggest economy for the next 12 months. Last week Premier Li Keqiang visited the country’s largest lenders with the message from the group that the government needed to take more measures to achieve its aim of stabilising economic growth. Further tax cuts approved by the group, on top of 500 billion yuan in personal income tax cuts, are expected to ease the burdens of value-added and company income tax. They will complement the fiscal boost for business investment and local government spending on infrastructure.
Officials will have to target these stimulatory measures judiciously as the country continues to deleverage following previous stimulatory packages that supported demand abroad as well as at home, but left a legacy of debt and other issues. It is a matter of debate whether the measures are adequate, with some observers interpreting them as a signal of difficulties ahead for China this year.
To be sure, some are disappointed that Beijing has not gone the extra mile by announcing stimulus that supports growth and markets around the world. In this respect it is worth recalling that the Central Economic Work Conference agreed that China must eventually rely on the potential of its home market for future prosperity, by boosting consumer confidence and spending in the domestic service sector.
With the economy slowing there is no question about the need for domestic stimulus. Policymakers have other options but most economists agree that not directly injecting capital into the system is a more rational approach, given the excesses of the past. The restocking of the banks’ liquidity with the release of frozen deposits is just a first step towards guiding the economy through the year ahead.
It adds to hopes for progress in China-US trade talks that have had a calming effect on markets. Positive sentiment about economic prospects in the longer term will be an incentive to borrowers and lenders to take risks. But it remains unrealistic to expect an immediate turnaround in the economy. We are likely to see worse before things improve.