Economic Stimulus Policy Has Become Inevitable for China – Analysis

By He Jun*

China’s economic growth targets and macroeconomic policies formulated at its annual parliamentary meetings the “Two Sessions” face the challenge of policy adjustment in just one month later.

In this year’s government work report, the GDP growth target is set at about 5.5%. There will be more than 11 million new urban jobs expected to be created. The yearly surveyed urban unemployment rate in China is expected to be within 5.5%. Meanwhile, consumer prices are expected to climb by roughly 3%. It is also expected that inhabitants’ incomes would expand at a similar rate to the overall economy. The quality of imports and exports would be steady, and the balance of payments would be basically zero, according to the forecast. In terms of fiscal policy, the deficit rate is expected to be about 2.8% (approximately RMB 3.37 trillion) this year, which is lower than the 3.2% deficit rate (approximately RMB 3.57 trillion) in 2021.

The above goals and policies were set under normal circumstances and did not take into account major events such as the Russia-Ukraine war, the resurgence of COVID-19, and the re-imposition of strict pandemic prevention and control measures.

At present, however, the current conditions both within and outside of China are not conducive to the country’s economic development. As the Russia-Ukraine war is likely to continue, the volatile global energy and food markets would affect not only Russia and Ukraine, but also the rest of Europe and the emerging market as well. In China, the post-pandemic global recovery may lead to a shift in orders and a slowdown in export growth. The pressure of strict prevention and control has a significant impact on the Chinese economy. Some cities in the eastern region have undergone lockdown for nearly a month, and parts of Shanghai have been closed for more than a month. Strict measures have led to large-scale disruptions to the nation’s logistics network and supply chain. People’s lifestyle and consuming habits have substantially been impacted in certain restricted cities. For the past two years, when the country’s economy was hit by COVID-19, the developed southeast coast regions have been supporting the other regions economically (as Shanghai has done during the period). Given that the current outbreak is mainly on the southeast coast, other regions are helpless in this.

The above challenges have brought new pressures on China’s economic decision-making.

The State Council executive meeting on April 6 mentioned that “the complexity and uncertainty of the domestic and international environments have intensified and in some cases exceeded expectations”. On April 11, Premier Li Keqiang, while attending a symposium in Jiangxi, emphasized that “we need to be highly vigilant for unexpected changes in the international and domestic situations and the downward economic pressure, and face up to and resolutely respond to new challenges”. To stabilize the economy and assure basic people’s living through supportive economic activities within a fair range of employment and price stability, the Chinese economy may need to enhance the execution of macroeconomic policies, as well as deepen the country’s reform and opening-up.

As a result, according to ANBOUND’s analysts, China may be forced to implement a huge economic stimulus strategy in 2022, with a focus on economic impetus. Some of the policy concerns are listed below:

The first issue looks at the different investment plans in parts of China. From January to February, the national fixed asset investment (excluding farmers) was reported at RMB 5.076 trillion, a year-on-year rise of 12.2%, 7.3 percentage points faster than that in 2021, and 8.3 percentage points faster than the average growth rate for the two years in 2021. Although the growth rate of investment is not slow, the huge investment scale is the sum of the investment plans of various places. The investment scale does not have incremental utility and cannot be regarded as a large-scale stimulus.

The second matter involves some major projects where local resources are concentrated. Any major project is usually the exclusive domain of state-owned enterprises. State-owned enterprises only act as the “second central bank” and invest part of their funds in major projects, which has certain limitations in bringing substantial incremental utility.

The third concern touches on real estate development and market policies. Under economic pressure, 60 cities in China have experienced the impact of the relaxation of real estate control policies. The primary goal is to improve the real estate market, although currently the country’s real estate market has been affected, putting locals in severe debt. Even the deployment of corrective policies can only help to ease the financial crisis to a limited extent, and the real benefits to the economy are limited.

The fourth has to do with direct consumption stimulus. In the past two years, the Chinese government has issued consumers vouchers in many places to alleviate the impacts of the pandemic and stabilize the economy. The issue could be complicated because, despite intractable financial constraints, issuing consumer vouchers requires substantial financial resources from central and local governments.

The fifth is associated with a cut in taxes and fees, rental, and interest. This approach not only contributes to reducing the total social cost but also lowers the operating costs of enterprises. For businesses under severe economic downward pressure, however, this approach has limited effect on the growth of economic volume but more of maintaining the current condition.

Each of the above issues has its own advantages and disadvantages, and the effect is different. The following aspects may require further attention.

Sixth, the Chinese government might further promote urban transformation. ANBOUND has mentioned that urban renewal is the key to the development of urbanization in the second half of the year. Through urban transformation projects, the process of urbanization is continuous, thereby increasing the value and output of urban spaces, which will generate economic growth.

Seventh, the Chinese government may revitalize the capital market and improve its attractiveness of the capital market while liberalizing direct financing. The development of the capital market has always been an obvious shortcoming in the Chinese economic system. The stock market, in particular, is not only a difficult platform to boost property income but also insecure when it comes to luring foreign investment.

Eighth, the Chinese government could implement an expansionary fiscal policy under special circumstances to moderately make up for the economic deficit. Facing downward pressure on the economy, only the central government can afford a higher debt ceiling. In general, macro policies require continuous deleveraging but in exceptional circumstances, deleveraging may have to be delayed. However, from the current economic condition in China, it seems inevitable that the debt ceiling will be breached.

Our proposal for a massive economic stimulus policy is different from the concepts introduced in the past few years. In past policies, the Chinese government adopted some systematic expansionary monetary and fiscal policies. By providing large liquidity, the “capital excess” mitigated the impacts of a lack of economic momentum. The massive economic stimulus policy we now propose is mainly to restore the Chinese economy in the post-pandemic period. During this period, the Chinese economy appears to have continued to be affected to some extent by the economic freeze following tighter pandemic control. If the Chinese government allows the market to adjust itself, there is a risk of economic stagnation.

*He Jun, Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.