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The View | Will China’s policy stimulus be enough to support the economy?
- Assuming Shanghai can fully reopen by the third quarter, and barring another lockdown in a major city, the measures announced should stabilise China’s economy
- However, the road to recovery is likely to be bumpy, and GDP growth may only reach 4 per cent this year
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There is finally light at the end of the tunnel for Shanghai as the city prepares to end its lockdown on June 1 and return to normality over the course of the month.
Amid the lockdown, China’s economy slumped in April, suffering its worst performance since the first wave of Covid-19 in the first quarter of 2020. But the economy is likely to have hit the bottom of this cycle.
Beyond the near term, policy stimulus will play a crucial role in boosting domestic demand this year. Policymakers have rolled out plenty of measures that could help facilitate an economic recovery in the second half, and more is likely to come.
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Of the measures, infrastructure investment will continue to be the most effective stimulus. Experience from the 2009 global financial crisis and China’s slowdown in 2015-2016 suggests that infrastructure spending was effective in bolstering economic growth.
Indeed, the Chinese government aims to spend the proceeds of local government special bonds, mainly used in infrastructure, by the end of August. Infrastructure investment can, therefore, be expected to do the heavy lifting to support economic growth.
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The deteriorating fiscal position of local governments could weigh on infrastructure spending, however. General revenue in April fell by over 40 per cent from a year ago. While the value-added tax rebates and tax cuts, which began in April, appeared to be a key reason for the sharp fall, tax receipts were also quite weak given the economic slowdown.
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