MNI: China Slowdown Likely To Prompt Extra Fiscal Stimulus

China’s economy is likely to grow by just over 5% in Q2, in line with the annual target of “around 5%” thanks mainly to robust exports, advisors and analysts told MNI, though they added that the first half slowdown and rising external uncertainty are likely to prompt an increase in government borrowing and fiscal stimulus.

Second-quarter GDP data to be released next Monday should show growth of 5.1%, following Q1’s stronger-than-expected 5.3%, said Zhang Yansheng, chief research fellow at the China Center for International Economic Exchange.

However, net exports, the main growth driver, could soon face a turning point, as overseas developed economies slow and erect more trade barriers, meaning H2’s expansion is likely to fall to around 5%, he said, adding that mid-July’s Communist Party Third Plenum could bring fiscal and tax reforms to boost domestic demand. Households, companies and local governments are still struggling with the financial impact of the Covid pandemic, and balance sheets must be repaired, he said.

“This would require substantial fiscal funds, and it is necessary to increase sovereign bond issuance,” he said.

RAISING DEFICITS

Increasing the central government’s fiscal deficit to 3.5% of GDP, above the current self-imposed 3% limit, would release about CNY700 billion of funds, and provide more flexibility than further issuance of special treasury bonds, even though these are not counted in deficit calculations, said Zhang Yiqun, director at a fiscal studies institute affiliated with Jilin province’s finance department.

“Funds raised by special treasury bonds need to be earmarked for specific projects, and the lack of eligible projects could reduce the efficiency of the funds,” he noted. “Raising deficits should help to ensure more than 5% growth in H2.”

Last October Beijing took the rare move of adjusting its budget mid-year, pushing 2023’s deficit to 3.8% of GDP through issuance of an additional CNY1 trillion of sovereign bonds. While it then restored its target to 3% at the beginning of 2024, this was intended to save policy space in the face of contingencies, Zhang Yiqun said, noting the impact of summer floods and rising trade tensions.

Sliding Jan-May revenues, down 2.8% y/y for those in the general public budget and 10.8% for the government funds budget, are a significant concern and constraining expenditure, he continued.

Local authorities also face decreasing revenues, with some resorting to raising money from fines and asset sales as they struggle with multiple policy goals including boosting consumption, he noted.

FASTER BOND SALES

Dong Zhongyun, chief economist at AVIC Securities, said issuance of additional sovereign bonds could be adjusted depending on economic conditions, noting that sales of project-linked government special bonds and ultra-long-term special treasury bonds have already picked up since May.

A significant boost to government financing in H2 should drive infrastructure investment growth to around 8% by year-end from 5.7% in Jan-May, said Dong, though he added the caveat that this will depend on the availability of suitable spending projects and local implementation.

The economic bright spot will remain manufacturing investment, which grew by 9.6% in Jan-May as authorities pushed for large-scale industrial equipment upgrading, noted Dong, who expects Q2 GDP growth at 5.3%, partly thanks to base effects after month-on-month growth in the same period last year of as low as 0.5%.

Home sales should gradually recover, buoyed by continuous stimulus, and real estate investment may stabilise from declines of over 10%, he said, though room for growth is limited given high residential borrowing. (See MNI EM: Big Price Cuts Needed To Lure China Homebuyers-Advisors)

“With the expected Federal Reserve rate cut in September approaching, China may also find a favorable window for easing monetary policy in H2. Growth-supporting macro policies alongside lowering nominal interest rates could lead to sustained economic improvement in China,” Dong added.