MNI POLICY: What China Could Do To Boost H2 GDP Growth

By Iris Ouyang

     BEIJING (MNI) - The recent release of relatively downbeat Chinese Q2 GDP

data could prompt Beijing to take various measures to try to increase the

likelihood of achieving its 2018 full-year growth target of 6.5%. 

     Indeed, as the ongoing trade spat with the U.S. is expected to weigh on

China's economic growth in the second half of the year, MNI considers five

potential courses of action that the world's second largest economy may take to

offset downward growth pressures:

     -- FISCAL STIMULUS

     China is likely to increase fiscal spending, especially to support

infrastructure investment. As we reported last Friday, a Ministry of Finance

research official told MNI that the government will use fiscal stimulus measures

to bolster investment "significantly" in H2. Debate over Beijing's fiscal policy

has intensified recently, with some economists advocating for it to be

'fine-tuned' so that it is more able to respond to the increasing sophistication

of China's economy. Xu Zhong, head of research at the People's Bank of China

(PBOC), last week criticized the current fiscal policy framework for failing to

bolster economic growth.

     --LARGER OMO LIQUIDITY INJECTIONS

     As China pushes ahead with efforts to deleverage its financial sector and

reduce local government debt, a negative side-effect is that many companies --

especially small and medium-sized enterprises -- are experiencing difficulties

in obtaining funds. In an effort to improve this situation, the PBOC has been

conducting open market operations (OMO) to boost liquidity levels. So far this

week, the central bank has injected a total of CNY470bn via its OMO -- CNY300bn

on Monday, CNY90bn on Tuesday and CNY80bn on Wednesday. The PBOC may seek to

increase the size of its OMO liquidity injections in order to loosen credit

conditions in the economy. The government is also increasing commercial bank

loan quotas, to try to encourage greater SME lending.

     --LOWER INTERBANK RATES

     Beijing is likely to take further steps to push down interbank rates in the

months ahead -- such as via further reserve requirement ratio (RRR) cuts and

possibly also by offering cheaper loans from central bank lending facilities.

Both the one-month and one-year maturities of the Shanghai Interbank Offered

Rate (SHIBOR) -- the benchmark interest rate used in lending activities between

banks -- have been on a declining trend since the beginning of July.

     --STEADY BASE RATE

     As the U.S. Federal Reserve is expected to further increase its benchmark

interest rate this year, the likely resulting rise in capital outflows from

China will add pressure on policymakers to tighten interest rates. However, the

PBOC is unlikely to take such action at a time when Beijing is trying to

stimulate economic growth.

     --LOCAL GOVERNMENT BOND ISSUANCE

     The rapid accumulation of local government debt over the past two decades

has been an important driver of China's strong GDP growth. However, Beijing has

been trying to encourage local governments to deleverage and cut off risky

financing channels in order to contain financial risks. Nevertheless, amid the

backdrop of a China-U.S. trade war and slowing economic growth, there have been

suggestions that officials may soon in fact choose to increase local government

bond issuance quotas, with the aim of boosting government-led infrastructure

investment growth -- which slowed sharply in Q2.

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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