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Macroscope | Fiscal spending a better tool than monetary easing to boost China’s economic growth
- Another interest rate cut could further weaken the renminbi while global inflation risks are rising and higher import costs threaten domestic price stability
- By contrast, rolling out more fiscal stimulus is a viable option as there is precedent of a higher budget deficit, and investor demand for Chinese debt remains firm
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What happens next for China’s monetary policy as the outlook for global growth continues to soften? Has Beijing reached the end of the road on monetary easing or is another interest rate cut on the cards?
While China’s economy needs as much support as possible to keep the government’s 2022 growth target of 5.5 per cent within reach, another interest rate cut may be risking too much for China’s currency when global monetary conditions are already tightening.
Beijing can’t afford to jeopardise the renminbi while global inflation risks are high and higher import costs could threaten domestic price stability in a bigger way.
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The simple solution might be to keep domestic monetary conditions steady and let fiscal expansion take the full strain of reflation efforts. That means temporarily shelving plans for fiscal stabilisation and issuing more government debt to plug a bigger budget gap, but domestic growth prospects should improve.
Beijing could normally open up the policy throttles on four fronts: cutting interest rates again, flooding the markets with extra liquidity, letting the yuan weaken, and pumping in more fiscal stimulus to sustain faster growth.
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It worked to Beijing’s advantage in the first Covid-19 wave two years ago, when the government stepped in with special policy measures to raise the annual growth rate from a lowly 2.2 per cent in 2020 to a vigorous 8.1 per cent in 2021.
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