The View | The 2 trillion yuan question: will China’s stimulus measures be enough to boost the economy?

How’s the Chinese economy doing? According to official data, it grew 6.6 per cent in 2018. Fourth-quarter GDP growth slowed, but not enough to indicate an economic slump. However, trade data seems to tell a different story from the GDP headline figures: imports of manufactured goods declined substantially in the second half of 2018, painting a more fragile picture of domestic demand. It’s worth bearing in mind that trade figures are more reliable as they can be cross-checked with trade counterparties. The trade data would also explain China’s swift policy change over the past few months: after years of trying to rein in corporate debt, Beijing is now focusing on demand stimulus.

Specifically, the Central Financial And Economic Affairs Commission, headed by President Xi Jinping himself and with Premier Li Keqiang as his deputy, is the supreme body in the Chinese economy. Each year, it sets national guidelines for the economy, and the financial and banking sector; if it needs saying, Chinese monetary policy is not independent.

Normally, Chinese monetary policy also focuses on interest rates and, traditionally, the key interest rates are the one-year lending and deposit rates. But because these should increasingly be geared to market interest rates, the People’s Bank of China wants to tinker with them less. Instead, many observers attach more importance to the reserve requirement ratio, which the central bank has lowered by a total of 350 basis points since the beginning of 2018. For banks to lend the money thus freed up and thereby stimulate the economy, the central bank is also applying quantitative measures. For instance, it has created the targeted medium-term lending facility – a policy tool similar to the European Central Bank’s targeted longer-term refinancing operations – to encourage commercial banks to provide credit support to private and small firms.

Fiscal policy has also played a significant role in propping up a weaker economy in recent years. To a large extent, local governments did this by using shadow budgets: setting up financing platforms to circumvent budget restrictions, borrowing from banks for infrastructure projects, and incurring massive debts off budget. To prevent shadow financing, Beijing has allowed local governments to issue special-purpose bonds (on budget) to fund infrastructure projects. This year, local governments issued such bonds as early as January, suggesting a more expansionary policy.