MNI: Scope For China Fiscal, Monetary Stimulus Seen As Limited

China will continue to face economic headwinds this year as consumption remains soft, the property sector fails to rebound and monetary and fiscal easing remains limited in its scope despite market positioning for further accommodative policies, economists and advisors told MNI.

Both fiscal and monetary expansion face constraints, the economists said. While the People’s Bank of China cut banks’ reserve requirement ratio by 25bp on Sept 15, pushing down the average to 7.4%, a consensus exists among policymakers that this should not fall lower than 5% to cushion possible financial risks, said Lu Ting, chief China economist at Nomura, adding that some small banks have already touched the red line.

Weak credit demand is the core issue rather than poor liquidity, which would make an RRR cut less effective, Lu said, and Chen Zhongtao, vice director at China Logistics Information Center, agreed, noting signs of a “liquidity trap”.

At the same time, already tight interest-rate margins limit the potential for policy rate cuts by the PBOC, Lu said, with small banks in a particularly difficult position to reduce lending rates. Further deposit rate cuts would hurt depositors, most of whom are on low incomes, he added, noting that the average deposit rate is already only about 1.8%.

Government moves to renew urban villages in big cities to boost demand have stirred wide attention, and some analysts have compared the plans with the shanty-house renovation campaign between 2015-2017, which fueled a property market bubble.

Lu said the enormous cost of the plan will make policymakers hesitant to repeat a large-scale campaign, and that the PBOC will not want to print more money to support it. The PBOC introduced a new tool, Pledged Supplementary Lending, in 2015 for shanty-house renovations and the outstanding PSL totalled CNY2.96 trillion at the end of August.

FISCAL DEFICIT

Liu Lei, senior fellow at National Institution for Finance and Development at the CASS, said fiscal authorities must boost the economy given the low chances of major monetary easing, calling for an increase in the fiscal deficit at March 2024’s “two sessions” meeting.

He estimated GDP would grow by 3.5% y/y in Q3, leading to 4.8% y/y growth in the first three quarters of this year.

But the room for fiscal expansion is also limited, according to Lu, noting that the central government’s balance sheet may not be as healthy as it appears once policy bank debt and the PBOC’s targeted tools are taken into account. The central government may also be forced to take on a portion of over CNY50 trillion in local government debt raised via off-balance-sheet funding vehicles, he noted.

LOWER GDP

Meanwhile the economy has likely not bottomed, despite some indicators pointing to marginal improvement over the past two months, said Lu, who attributed the recent recovery to rising energy and commodities prices alongside base effects and seasonality.

He predicted GDP would grow by 4.8% y/y in 2023, compared with the official circa 5% target. Consumption will slow further following the eight-day National Day holiday, while the increase to house sales – boosted by the recent relaxation of regulation – could flame out, Lu warned. Higher house prices in big cities will also squeeze demand elsewhere, pulling the overall performance of the sector below expectations, he said.

Chen, from CLIC, took a similar view, predicting that Q3 data due Oct 18 would show GDP expansion of about 4.3% y/y, compared to 6.3% in Q2. While the latest PMI read pointed to an accelerating recovery in September, its potential sustainability was unclear, he said.

The market should not underestimate headwinds as the economy faces not only the lingering side-effects of the Covid pandemic but a complicated external environment at a time when China’s development model is in transition, warned Chen.

Recent national holiday consumption levels showed average daily consumption and per capita spending were lower than in 2019, he said, noting that this indicated consumer sentiment remained soft as real income has fallen.