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China economy

How far should China go to stimulate the economy? That’s a question for Xi Jinping in 2019

  • China taking incremental approach to stimulus, based on economic performance and trade talk progress
  • With the economy expected to slow further next year, Xi Jinping needs to find ways to put growth on track without worsening China’s long-term economic problems
PUBLISHED : Thursday, 20 December, 2018, 7:31am
UPDATED : Thursday, 20 December, 2018, 11:16pm

A debate is heating up among Chinese economists and researchers over how far Beijing should go to boost growth in 2019, as the country braces for additional economic downdrafts from the trade war with the US.

Beijing has so far refrained from the all-out economic stimulus it enacted in response to the global economic crisis a decade earlier.

But it has shifted priorities to “stabilising” growth since the summer by boosting fiscal spending and keeping a modestly looser monetary policy stance, deviating from three key policy goals set earlier this year to cut excess debt and contain financial risks, curb pollution and reduce poverty.

Beijing’s policy response so far has proved too mild to arrest a deepening slowdown. Chinese economic indicators for November painted a gloomy picture of exports, industrial production, consumer spending and foreign investment while almost all financial institutions, both Chinese and foreign, predicted that the growth rate would continue to decelerate to just above, or even below, 6 per cent next year from an expected 6.5 per cent rate this year.

It is against this backdrop that Chinese President Xi Jinping and the country’s top policymakers are gathering in a guarded military hotel in Beijing this week to chart out economic policies for next year.

On the one hand, Beijing remains cautious about bolstering short-term growth by accumulating more debt and printing money, as this would only amplify the country’s massive debt problem. On the other hand, growing trade tensions have shattered business, consumer and investor confidence to the point that China’s economy is cooling off more rapidly than many expected, which means only a large dose of stimulus from the government’s old playbook offers a quick remedy.

Xi said at the latest Politburo meeting last week that China will focus on building “a powerful home market” in 2019 as a priority to cope with external uncertainties, with the ongoing Central Economic Work Conference expected to nail down the exact policy remedies Beijing will pursue.

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A massive stimulus like the one started in 2008 – when the People’s Bank of China (PBOC) printed large amounts of money and Chinese banks rushed to lend to local governments and state firms to invest – is unlikely, economists said.

“A large stimulus is better deployed to counter an already existing crisis, not used as a precautionary act,” said Ding Shuang, chief Greater China economist at Standard Chartered Bank. “Otherwise, you’ll lose the policy leeway and tools when the real crisis comes.”

China was still taking a wait-and-see stance, enhancing its pro-growth efforts in an incremental manner in line with economic performance and the progress in trade talks with the US, Ding said.

“There’s less room for a big stimulus like 2008 and the effect on growth is declining.”

When Beijing announced its 4 trillion yuan (US$586 billion) stimulus package in November 2008, the country’s debt-to-GDP ratio was 150 per cent.

The ratio jumped to more than 260 per cent last year, triggering aggressive government efforts to slash leverage in the first half of this year.

Given concerns about high debt, China will have to lean on expansionary fiscal spending for next year’s stimulus programme.

The annual Central Economic Work Conference, which will wrap up this week, is expected to set a lower growth target and a bigger fiscal deficit for next year. The budget deficit limit may go beyond 3 per cent of gross domestic product, up from 2.6 per cent this year, to allow for a tax-cut package worth at least 1.2 trillion yuan.

Speaking at the Great Hall of the People on Tuesday, Xi reiterated that the government would pursue “high-quality, more efficient, just and sustainable growth” while building a modern economic system.

“We must insist on supply-side structural reforms, actively transform our way of growth, optimise the economic structure, change the drivers of growth and expand domestic demand,” he said in the address marking the 40th anniversary of the reform and opening up policy initiative that transformed the Chinese economy.

Lessons of past point way ahead for Xi Jinping as opening up goes on

A growth rate of 8 per cent per year was once a floor that former Premier Wen Jiabao vowed to defend at all costs, based on the theory that it was necessary to support employment and ensure social stability.

After the global financial crisis hit China and millions of migrant workers at export-reliant coastal factories were laid off, Wen’s cabinet loosened the government purse strings, while turning a blind eye to the thousands of local government financing vehicles that were set up to generate the financing to fund the country’s massive fiscal spending programme.

The massive debt that these agencies accumulated lies at the core of the country’s current excess debt problem.

Huang Zhilong, a senior researcher at Suning Financial Research Institute, said the trade war with Washington had yet to cause substantial damage to the Chinese economy, as the economic growth rate and employment remained strong.

“The most important policy signal sent by the central government recently is that employment is the top priority rather than economic growth,” he said.

“Now that more jobs are being created in the service sector, traditional stimulus, which is mainly set to boost infrastructure spending and save manufacturing jobs, doesn’t well fit with the new situation.”

There’s less room for a big stimulus like 2008 and the effect on growth is declining
Ding Shuang, chief Greater China economist at Standard Chartered Bank

Huang said that the great uncertainty created by the trade war had dampened corporate confidence and market sentiment, but even if the effects of the US tariffs were factored in to next quarter, China’s economy was still likely to by 6.2 to 6.3 per cent.

Beijing was likely to enact a tax cut of 1.64 trillion yuan next year, up from this year’s 1.3 trillion yuan reduction, and could even unveil a multi-year tax cut plan, such as cutting 5 trillion yuan over three years to lift confidence, he said.

Xie Yaxuan, chief macro analyst at China Merchants Securities, said Beijing should make policy decisions based on the actual economic situation rather than firing all its shots all at once, as this approach would be too costly a way to prop up growth.

The world’s second-largest economy switched to a defensive mode in August, he said, with some of the government’s old stabilisation tools – such as cuts in banks’ required reserve ratio, more infrastructure spending and yuan depreciation – resurfacing.

But other policy ammunition – such as cuts in the main policy interest rates, an easing of property market curbs and reinstating a car purchase tax rebate – would depend on the way the economic situation unfolded, Xie wrote in a research note.