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12/03/2020

Coronavirus: China should not rely on massive stimulus to overcome ‘unprecedented’ economic slowdown

In response to the 2008 global financial crisis, China pumped a 4 trillion yuan (US$575 billion) into its economy but it led to a mountain of local government debt
Various early indicators suggest China’s economy will slow in the first quarter of 2020, with some suggestions it will suffer a first contraction since 1976

President Xi Jinping said China must accelerate construction of “new infrastructures such as 5G networks and data centres” on top of speeding up “key projects and major infrastructure construction” in response to the economic impact caused by the coronavirus outbreak. Photo: Xinhua

China should not try to bolster its coronavirus-hit economy by again resorting to a massive debt-fuelled fiscal and monetary stimulus programme, according to a group of government advisers.

Various early indicators suggest China’s economy will slow in the first quarter of 2020, with some even suggesting it will suffer a first contraction since the end of the Cultural Revolution in 1976.

This raises the question if China will miss its key 2020 growth target, with voices on both sides of the debate discussing what stimulus policies are needed to offset the deep impact of the coronavirus.

China is already leaning towards some additional stimulus, with Premier Li Keqiang ordering the central bank pump additional money into the banking system, while President Xi Jinping has announced the need for more spending on “new infrastructure”.

Are there other ways out for China except stimulus policies?Liu Shijin

“Are there other ways out for China except stimulus policies?” rhetorically asked Liu Shijin, who previously worked closely with Vice-Premier Liu He, the top economic aide to Xi, at the Development Research Centre, the think tank attached to the State Council.

“If it really works, why can’t Japan and the United States reach a 5 per cent growth rate?”

It is believed China will need to achieve an average 5.6 per cent growth in 2020 to achieve its goal of doubling the size of its economy from 2010, which is a key goal for

Xi to achieve his target

of creating a “comprehensively well-off” society.

China’s economy grew by 6.1 per cent in 2019, and while it was the slowest in 29 years, the US economy only grew 2.3 per cent, with Japan’s estimated to grow by 0.9 per cent.

What is gross domestic product (GDP)?

Liu Shijin, who is now a deputy head of the China Development Research Foundation and a policy adviser to the People’s Bank of China, argued that a growth rate averaging 5 per cent over the next decade is sufficient for China to meet its development goals.

Growth in 2020, though, may well be below 5 per cent given that the impact of the coronavirus is “unprecedented” and larger than both severe acute respiratory syndrome (Sars) in 2003 and the 2008 global financial crisis.

Xi said earlier this month that China must accelerate construction of “new infrastructures such as 5G networks and data centres” on top of speeding up “key projects and major infrastructure construction already included in state plans” like additional high-speed railway lines in response to the economic impact caused by the coronavirus outbreak.

But as this will mainly rely on corporate and private investment, Liu Shijin feels it will be too small to engineer a major rebound in the growth rate.

When encountering challenges, we should first push forward new reform measures to unleash growth potential. Now is the right timeLiu Shijin

“It’s a different thing compared to real [government-led] economic stabilisation,” Liu Shijin told a web seminar hosted by Peking University’s National School of Development on Wednesday.

“When encountering challenges, we should first push forward new reform measures to unleash growth potential. Now is the right time.”

Instead, to support longer-term growth, China should put its efforts into the development of its “city clusters”, which could lead to higher spending on housing construction, urban infrastructure and manufacturing, added Liu Shijin, which would increase the growth rate by up to an additional percentage point over the next decade.

China has so far refrained from the massive stimulus programme it adopted in 2008 in response to the global financial crisis, which included a 4 trillion yuan (US$575 billion) plan that pumped cheap money into government-backed projects but also created a mountain of local government debt.

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Zhang Bin, a senior researcher at the Chinese Academy of Social Sciences, said infrastructure construction will remain an important part of any plan to support growth.

“If the funding [for the 4 trillion yuan stimulus] had come solely from treasury bonds or local government bonds [rather than risky lending], there wouldn’t be so much shadow banking, unmanageable credit expansion, high leverage, implicit liabilities or financial risks,” he said.

“If the balance sheets of corporations, households and local governments can’t be repaired, it might lead to insufficient demand and a decline into a vicious [downward] cycle.”

Zhang, like Liu Shijin, is a key member of the China Finance 40 Forum, a group of state economists who advocate more structural reforms to support the Chinese economy. In particular, Zhang has set sights on reforms that would boost consumption, which accounted for 58 per cent of Chinese growth last year.

“The biggest weak link of the Chinese economy is that 200 to 300 million migrant workers can’t [legally] settle in big cities,” he said. “Only if they are able to settle in the city that China can be called a real well-off society. It will also boost the economy, lift demand for manufactured goods and unleashed consumption potential.”

Currently, most large Chinese cities only provide social services including health care and schooling to residents who have a legal permit, or hukou. Most migrant workers who come to the big cities for jobs are blocked from obtaining a hukou, meaning they have to travel back to their rural hometowns to have access to basic social services, so often do not settle in their adopted city.

In response to this idea, Xu Yuan, a professor at Peking University, called for the government to build 10 million affordable housing units annually to accommodate new urban citizens, which would address short-term economic pain and serve the nation’s long-term development.

China will release its annual growth target as well as other key goals, including the fiscal deficit ratio and local bond quota, at the National People’s Congress, although the annual parliamentary convention, previously scheduled for March 5, has been postponed, with a new date yet to be announced.

Source: SCMP

Posted in 1976, 2020 growth target, 5G networks, affordable housing units, China, China Development Research Foundation, China Finance 40 Forum, Chinese Academy of Social Sciences, Construction, coronavirus, data centres, Development Research Centre, Economic, economic slowdown, Health care, hukou, Japan, legal permit, massive stimulus, migrant workers, National People’s Congress, National School of Development, new infrastructures, overcome, Peking University, Peking University’s, People’s Bank of China (PBOC), President Xi Jinping, schooling, Severe Acute Respiratory Syndrome (SARS), slowdown, social services, State Council, Uncategorized, United States, unprecedented, urban citizens, Xinhua | Leave a Comment »

10/03/2019

China central bank pledges more policy support as bank lending slides

BEIJING (Reuters) – China’s central bank on Sunday pledged to further support the slowing economy by spurring loans and lowering borrowing costs, following data that showed a sharp drop in February’s bank lending due to seasonal factors.

The central bank is widely expected to ease monetary policy further this year to encourage lending especially to small and private firms vital for growth and job creation.

The central bank’s “prudent” monetary policy will emphasize on counter-cyclical adjustments, said People’s Bank of China (PBOC) Governor Yi Gang, using a phrase that implies the need to fight an economic slowdown.

“The global economy still faces some downward pressure and China faces many risks and challenges in its economy and financial sector,” Yi said at a press conference on the sidelines of the country’s annual meeting of parliament.

There is still some room for the PBOC to cut reserve requirement ratios (RRRs), although the amount of room is less compared with a few years ago, Yi said.

The PBOC has cut the amount of cash that commercial banks need to set aside as reserves five times in the past year to spur lending to small businesses in the private sector. The RRR for big banks is now at 13.5 percent and the ratio for small- to medium-size banks is at 11.5 percent.

Yi said lending rates for small firms are still relatively elevated due to higher risk premiums and the central bank will forge ahead with reforms to lower such risk premiums.

High risk premiums on loans to small firms reflect commercial banks’ traditional reluctance to extend credit to the sector because of concerns about their creditworthiness.

PBOC data on Sunday showed new bank loans in China fell sharply in February from a record the previous month, but the drop was likely due to seasonal factors, while policymakers continue to press lenders to help cash-strapped firms stay afloat.

A pull-back in February’s tally had been widely expected as Chinese banks tend to front-load loans at the beginning of the year to get higher-quality customers and win market share.

Chinese banks made 885.8 billion yuan ($131.81 billion) in net new yuan loans in February, down sharply from a record 3.23 trillion yuan in January, when several other key credit gauges also picked up modestly in response to the central bank’s policy easing.

Yi said combined January-February new loans and total social financing (TSF), a broad measure of credit and liquidity in the economy, could paint a more accurate picture as they showed a rise of 374.8 billion yuan and 1.05 trillion yuan from a year earlier, respectively.

DEBT DEFAULTS

Analysts say China needs to revive weak credit growth to help head off a sharper economic slowdown this year, but investors are worried about a further jump in corporate debt and the risk to banks as they relax their lending standards.

Corporate bond defaults hit a record last year, while banks’ non-performing loan ratio notched a 10-year high.

Pan Gongsheng, a vice governor at the PBOC, told the same briefing that China will control the amount of bond defaults in 2019, using both legal and market means.

Pan conceded that bond defaults increased last year, but the level of defaults was not high compared with China’s average bad loan ratio.

Premier Li Keqiang told parliament on Tuesday that monetary policy would be “neither too tight nor too loose”. Li also pledged to push for market-based reforms to lower real interest rates.

Chinese policymakers have repeatedly vowed not to open the credit floodgates in an economy already saddled with piles of debt – a legacy of massive stimulus during the global financial crisis in 2008-09 and subsequent downturns.

Sources have told Reuters the central bank is not ready to cut benchmark interest rates just yet, but is likely to cut market-based rates.

Yi said the downward trend in TSF has been initially curbed and broad M2 money supply growth will be more or less in line with nominal gross domestic product growth in 2019, Yi added.

Central bank data showed growth of outstanding TSF, a rough gauge of broad credit conditions, slowed to 10.1 percent in February from January’s 10.4 percent, versus a record low of 9.8 percent in December.

M2 money supply grew 8.0 percent in February from a year earlier, missing forecasts, the central bank data showed. Yi said China’s macro leverage ratio, or the amount of debt relative to GDP, was at 249.4 percent at the end of 2018, a fall of 1.5 percentage points from a year earlier, Yi said.

Analysts note there is a time lag before a jump in lending will translate into growth, suggesting business conditions may get worse before they get better.

Most economists expect a rocky first half before conditions begin to stabilize around mid-year as support measures begin to have a greater impact.

China’s economic growth is expected to cool to around 6.2 percent this year, a 29-year low, according to Reuters polls.

Growth slowed to 6.6 percent last year, with domestic demand curbed by higher borrowing rates and tighter credit conditions and exporters hit by the escalating trade war with the United States.

Source: Reuters

Posted in bank governor, bank lending, cash-strapped firms, Central bank, China alert, downward pressure, economic slowdown, escalating, financial sector, front-load loans, GDP, global economy, High risk premiums, higher-quality customers, lending rates, massive stimulus, Pan Gongsheng, parliament, People’s Bank of China (PBOC), piles of debt, policy support, policymakers, Premier Li Keqiang, pull-back, reserve requirement ratios (RRRs), seasonal factors, slowing economy, small firms, tally, trade war, Uncategorized, United States, vice governor at the PBOC, Yi Gang, yuan | Leave a Comment »

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Are there other ways out for China except stimulus policies?Liu Shijin

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