What are the next steps from Chinese policymakers to support the economy? Will they favor monetary or fiscal policy?
China reported a 3.2% year-over-year real Gross Domestic Product (GDP) growth in the second quarter, signaling a resilient recovery from the pandemic shock. That said, the economy is still facing unemployment pressure from the below-trend growth, hence policymakers will likely support the economy with more stimulus measures.
Fiscal policy remains the major channel for stimulus, but with different approaches than the universal cash payments to households and enterprises in Europe and the U.S. Instead, the government continues to promote infrastructure projects as a way to create jobs and boost long-term economic potentials. A total of RMB 2.27trillion in special local government bonds had been issued through the end of July, which provided strong support to infrastructure investment. There is still an RMB 1.48trillion issuance quota remaining for the rest of this year, and the central government keeps pushing for bond issuance and project starts at the local level.
On the one hand, the economic recovery allows the central bank to maintain a balanced monetary policy stance with a focus on supporting specific sectors within the real economy. The People’s Bank of China (PBoC) will rely on its structural tools to inject liquidity into the market and support certain sectors including small and medium-sized enterprises (SMEs), inclusive finance and technology sectors. On the other hand, the central bank will likely keep policy rates unchanged while further controlling speculative activities in property and financial markets.
Beyond the traditional operations abovementioned, it is noteworthy that the government is aggressively escalating its efforts to support domestic technological development amid the elevating geopolitical tension. On August 4, a tax holiday as long as 10 years was announced for chip manufacturers. Meanwhile, initial public offerings keep accelerating on the ChiNext and STAR boards, the two venues for technology listings.
Exhibit 1: China: fiscal policy
The PBoC has maintained a balanced monetary policy while the U.S. Federal Reserve and European Central Bank have been conducting aggressive asset purchases. As a result, Chinese treasury yields remain higher than those developed market issuers, and the renminbi has appreciated against the U.S. dollar. These factors make Chinese bonds attractive for foreign investors, evidenced by the RMB 146.3billion in inflows into onshore central government and policy bank bonds in July. The inflows might be sustainable as long as the monetary policy difference remains, making Chinese bonds increasingly important for global investors’ strategic allocations.