MNI: China Seen Holding Off From Big Fiscal Stimulus

China will hold off from major fiscal stimulus for the second half of the year, with authorities concentrating on making existing programmes more efficient in order to encourage market forces, given that the economy remains on track to meet its 5% growth target for 2023, advisors and analysts told MNI.

Following Q2 GDP growth of just 6.3% compared to a median forecast of 7%, speculation has built of further spending, funded perhaps by an increase in the fiscal deficit or by issuance of special Treasury bonds. However, a Politburo meeting this week omitted any announcement of large-scale fiscal expansion, emphasising instead the need to speed issuance and use of CNY3.8 trillion of local government special bonds to fund spending programmes and to “optimise and improve” tax and fee cuts.

Zhang Yiqun, director at a fiscal studies institute affiliated with Jilin province’s finance department, said strong stimulus would bring negative side effects and should be unnecessary while the economy recovers gradually. “It shouldn't be too much of a problem to grow over 5% in H2 and achieve the annual target with GDP already rising 5.5% in H1,” he said.

The government is instead likely to use policy-bank-based financial instruments to raise several hundred billion yuan in capital for major projects to send a pro-growth signal, Zhang said, adding that fixed-asset investment, which rose only 3.8% y/y in H1, should rebound as infrastructure construction enters peak season. The economy’s growth trend has not changed and local governments have still to use a large part of the proceeds of special bonds already issued this year, he noted, making further stimulus unnecessary.

Still, the central government could consider moderately increasing sales of Treasury bonds to relieve some of the burden on local governments, Zhang said. Preferential tax policies set during the pandemic for smaller companies and tech firms should be made permanent, he said, while private investment should be encouraged to renovate run-down neighbourhoods left behind as big cities developed.

CONSUMPTION RECOVERY

The focus of fiscal policy in H2 should support private and small businesses and create jobs, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance Company.

In addition to short-term stimulus like issuing consumer coupons and purchase subsidies for home appliances and cars, long-term reform aimed at increasing the spending power of low-income groups is also necessary, said Xu Hongcai, deputy director at the China Association of Policy Science’s Economic Policy Commission, calling for state-owned assets to be used to top up pension funds and for better social security for country dwellers.

Xu said the economy could grow 5.3% in H2, bringing annual growth to 5.4%, based on current policy settings. Consumption should continue to recover, after per capita disposable income increased 6.5% y/y in H1, accelerating from Q1’s 5.1%, he noted. Final consumption expenditure accounted for 77.2% of economic growth in H1, more than double the 32.8% in 2022, official data shows.

Still, authorities should do more to incentivise investment in green energy and smart manufacturing, health and elderly care, to offset the decline in real-estate, Xu said.

Healthy growth in fiscal revenue, which rose 13.3% y/y in H1, with tax revenue up 16.5% as an end to pandemic rebates saw value-added tax takings soar 96%, should give space to continue preferential tax policies to improve business profit margins, he said.