Macroscope | Will China’s ‘zero-Covid’ policy thwart its plan for infrastructure-fuelled stimulus?

There are plenty of uncertainties in the global economy and markets. In the past few months, one of the biggest questions facing investors is whether China’s more aggressive stimulus programme can mitigate the damage caused by the government’s uncompromising “dynamic zero-Covid” policy, which has resulted in a stop-start economy.

The fact that China’s stimulus package is a major talking point in markets is itself a testament to the dramatic shift in economic policy since the start of this year. In 2021, Beijing’s deleveraging campaign and regulatory clampdown stood in sharp contrast to the explosive stimulus-fuelled rallies in advanced economies. While the benchmark S&P 500 equity index soared nearly 27 per cent, the blue-chip CSI 300 gauge fell about 5 per cent.

This year, the US Federal Reserve has embarked on a rapid tightening of monetary policy to rein in high inflation. President Xi Jinping, by contrast, has instructed the government to make an all-out effort to boost infrastructure investment in response to the severe economic disruptions caused by China’s draconian controls to stamp out Covid-19.

As the Fed implements the biggest increases in interest rates in decades, clobbering global bond and equity markets, Beijing is resorting to its old playbook of boosting growth through public investment. Since the 2008 financial crisis, infrastructure and property were the main sources of the credit-fuelled excesses that the deleveraging drive had sought to tame.

In a sign of the extent to which China has been forced to shift to looser policy, local governments – a crucial funding conduit for infrastructure projects – sold a record 1.9 trillion yuan (US$288.5 billion) of bonds last month, topping the previous all-time high of 1.3 trillion yuan in May 2020.

What is more, to speed up infrastructure investment, the government is considering fast-tracking the issuance quota for local government special purpose bonds that fund infrastructure schemes, freeing up a further 1.5 trillion yuan for investments in the second half of this year.