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.
But how extensive are the stimulus measures and will they be sufficient to strengthen the Chinese economy? This question is hard for foreign observers to answer because economic policy works differently in China than in Western industrialised countries; in China, political decisions are centralised, and the Communist Party plays an outsize role in the economy.
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.
However, tax policy should provide a greater impetus. This week, the biggest
tax-cut package in China's history has been announced. Beijing will lower value-added tax and social security payment rates for companies, to reduce costs and boost private demand. The entire tax package is expected to amount to around 2 trillion yuan, some 2 per cent of GDP. As a result, the government’s budget deficit ratio is likely to reach 2.8 per cent of GDP for 2019, up from 2.6 per cent in 2018.
Historically, Chinese authorities tended to increase the export tax refund rate to help boost exports when the economy was slowing. However, given that global economic headwinds remain strong, it might be difficult to tap into the global market for extra growth. While China will continue to provide support to exporters, the most significant change in trade policy is likely to be Chinese efforts to mitigate the effects of the trade war with the United States. Making a trade deal would be crucial to dispelling financial market concerns and shoring up business confidence.
In the past, an effective instrument for promoting growth was the relaxation of real estate market regulations: placing fewer restrictions on property purchases or lowering requirements for down payments. But this time, deregulation of the market is unlikely to take pride of place because of asset bubble risks in some regions. The biggest change in China’s real estate policy is that the authorities are adopting a
city-specific approach, and giving local governments more discretion in designing housing policies. Cities with high unsold inventories may well ease regulations. However, an across-the-board easing is unlikely for now.
All in all, Chinese authorities have taken extensive measures to revive the economy. But will these measures have an effect? Again, the best indicator would be foreign trade. A return to positive growth in Chinese imports would be a clear signal that domestic demand is picking up again. Bank loans, already responding to stimulus, have risen recently. Real estate prices are also giving positive signals. Housing prices across the country rose by just under 8 per cent year on year in the fourth quarter of 2018, a much stronger increase than at the beginning of the year.
In view of these encouraging signals, we can expect Beijing to succeed in stabilising the economy, which should boost domestic demand and also benefit manufacturing in other countries.
Hao Zhou is senior emerging markets economist at Commerzbank
This article appeared in the South China Morning Post print edition as: Are the boosts enough?
