MNI INTERVIEW: More Stimulus Needed To Counter China Slowdown

The Chinese government needs to adopt more aggressive expansionary macroeconomic policies, including more fiscal spending and rate cuts, to bolster demand as factory orders shrink rapidly, while authorities should implement recently announced supply-side policies as soon as possible, a former member of the People's Bank of China's Monetary Policy Committee told MNI.

Huang Yiping, now deputy dean of the National School of Development at Peking University, called on macro policymakers to move faster to support the economy and ensure it grows at 5% in the second half of the year. “Major indicators point to further economic weakness in July – the most concerning is a reduction of orders reflecting an overall softness of exports, consumption and investment,” he warned. The second half's performance risks failing to match H1’s growth rate of 5.5% unless authorities provide more stimulus, Huang said in an interview.

China has announced a series of support measures since August amid fading economic confidence, targeting private business, foreign investors, capital markets and consumers among others.

Whether these measures will work in a timely and effective manner to increase factory orders – directly feeding into production, investment and employment – remains uncertain, Huang added. While authorities have flagged their desire to support private and foreign companies, they must now produce practical actions, he said. The government could allow private and foreign companies, particularly technological firms, to participate in some state projects or include them in government procurement lists to boost confidence, he continued.

KEY FUNDAMENTALS

The economist noted that the yuan and equity market weakness in recent months would continue unless the economy improves. Concerns over economic performance have driven the yuan’s rapid depreciation this year, though, while the PBOC can only curb the pace of the fall, said Huang, noting that it still has plenty of tools to stabilise the forex market, including use of China’s ample foreign reserves and controls on capital outflows.

The PBOC’s recent efforts to shore up the yuan have aimed at preventing a sharp depreciation from triggering significant capital outflows, which remains a more important priority for the moment than boosting exports despite weak orders, he said.

RATE CUTS

The economy increasingly needs policy easing – particularly a rate cut – to expand credit more than liquidity injections, as this would more effectively lower funding costs and ease company debt burdens, Huang said.

The PBOC has cut its key policy rates twice this year, reducing the one-year medium-term lending facility rate by 25bp and the seven-day repo rate 20bp. It has also guided the reference lending rate, or Loan Prime Rate, lower by 20bp for the one-year tenor and 10bp for five years. State-owned lenders have also lowered deposit rates three times since last September.

Huang said the deposit rate cuts were expected to reduce the increasing pile of savings and boost consumption, while easing pressure on banks’ narrowed interest margins and make it easier for them to dispose of bad loans. “A lower deposit rate creates bigger space for a loan rate cut,” he said.

Policymakers may prefer supportive measures to encourage a “virtuous recovery,” rather than major stimulus measure that could create asset bubbles and debt, he said, noting however that such a recovery takes time and entails greater risks. “We should not rule out the possibility that companies fail due to lack of orders in the process of a gradual recovery, leading to unemployment and the formation of a ‘vicious cycle,’” he warned.