China must boost fiscal stimulus as global and domestic challenges loom
- Recent Chinese economic data and global trade figures are an early warning signal that global recovery is slowing in the face of several lingering problems
- China should not turn to much looser monetary policy to get faster results, given that fiscal expenditure can be increased without great damage to government finances
China needs to step up as the world economy shows more signs of growing duress. Global supply chain shortages, rising world energy prices, lingering Covid-19 uncertainties and ebbing economic confidence are adding weight to the notion of economic slowdown ahead.
It’s consistent with China’s factory sector generally maintaining a steady rate of expansion but well below the robust rate of recovery experienced earlier in the year as the economy bounced back from the worst of 2020’s Covid-19 emergency. Respondent firms indicated relatively subdued demand conditions and material shortages were weighing on production.
Employment activity and new export orders both dipped below the critical 50 marker, suggesting domestic and external demand conditions remain vulnerable and in need of an extra lift.
Strong export performance has provided a massive boost to China’s economic rebound in the last year. The latest data indicates global demand for China’s goods surging by 25.6 per cent year on year to a record US$294 billion in August.
Beijing should be able to do better than the 5.25 per cent average forecast for GDP growth expected by the International Monetary Fund over the next five years, but it will take extra effort on the part of fiscal stimulus to maintain the positive momentum going forward.
In fact, there are signs that Beijing might be falling behind the curve on what is needed this year, with accumulative fiscal expenditure in the first eight months to August only up 3.6 per cent from a year ago. But this could easily be increased without too much damage to government finances.
Beijing should maintain steady interest rates and resist the temptation to turn to much looser monetary policy to get faster results. Excessive domestic credit expansion has led to the sort of problems epitomised by the Evergrande debt saga. A shift towards ultra-low interest rates should be avoided at all costs.
David Brown is the chief executive of New View Economics