MNI INTERVIEW: China GDP Needs A Fiscal-Monetary Boost-Advisor

China needs to expand fiscal and monetary policy options into next year to stimulate credit demand in a bid to boost GDP growth above 5%, a former senior advisor to the People’s Bank of China told MNI.

A key reason is that monetary policy easing alone is not enough to stimulate the economy, due to weak loan demand from companies, the advisor added.

“I think fiscal policy should be more expansionary and then the PBOC could coordinate via a further cut of the reserve requirement ratio and the benchmark loan rate,” Yu Yongding, a senior fellow at CASS, China’s top official think tank, and a former member of PBOC’s monetary policy committee.

Yu said, “it is less effective to increase credit and liquidity supply when investment and consumption are soft, so the fiscal policy should be bolder.”

On Monday, the PBOC cut the one-year benchmark Loan Prime Rate (LPR) by 5 basis points, in a move that iwas largely expected by the market following a second RRR cut this year that took place this month.

BEIJING’S WALLET

Funding approved by Beijing can support infrastructure investment led by all levels of government, which will play an engine to cushion economic slowdown, Yu suggested.

He stressed this is different from previous stimulus plans, which focused on projects like highways, railroads, and airports.

The authorities will focus on “new infrastructure projects” involving 5G, high-tech, new energy, an IT among other sectors, which will create a “crowding in ” effect on private investment, Yu said.

According to Ministry of Finance, fiscal revenues rose by 21.8% while spending grew by just 4.8% in the first half of this year, which, Yu said, was an obvious sign of fiscal tightness.

TURNING ON THE TAPS

One quick and effective way to turn on the fiscal taps is to increase central government bond (CGBs) issuance to finance a larger budget deficit, which in turn is a result more budget expenditure.

The PBOC could then cut the RRR further and lower the benchmark loan rate. With a lower interest rate, the PBOC would be able to cut the costs of CGB issuance. The PBOC could also buy CGBs in the secondary government bond market.

A PROPER STANCE

Yu noted that China has moved to normalise its policy too soon after the global financial crisis and it may have done the same in the middle of 2021, when the economy had yet to recover fully, see: MNI: Tepid M1 Growth Tilts PBOC Easing Views-Advisors.

There are three factors that should be taken into consideration when talking about the proper stance of monetary policy: economic growth, inflation and stability of financial system, Yu said.

“As long as inflation remains moderate and financial risks are under control, our policies should be loosening to achieve a growth rate as high as possible.” Yu said. He noted that, even if China can achieve a GDP growth rate above 8% for 2021, it is not a particularly high growth rate because of the base effect.

PROPERTY AND YUAN

Yu also said that the proportion of property investment in GDP has been too high.

According to National Bureau of Statistics, the proportion was about 16.7% as of the end of September, compared with less than 6% in average in most developed countries.

Housing prices in first tier cities have been too high. The challenge is that authorities must avoid causing a crash in the housing market, while containing the rise of the housing prices.

With the Federal Reserve likely to hike interest rates in 2022, the PBOC’s pace of easing will need to factor in a “more complicated” external situation, Yu said.

A big concern is a weaker yuan could intensify imported inflation and enhance expectations of shorting the currency, and then the PBOC may have to consider the possibility of intervention in the yuan exchange rate. The worry in that case, Yu said is a potential monetary policy distortion.