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As headwinds rise, China seen quickening fiscal support to protect growth

China is poised to quicken spending on infrastructure projects while the central bank supports with modest easing steps, as risks from the Delta variant and floods threaten to slow its recovery, policy insiders and analysts said.

As headwinds rise, China seen quickening fiscal support to protect growth

People walk in Lujiazui financial district during sunset in Pudong, Shanghai, China, Jul 13, 2021. (File photo: REUTERS/Aly Song)

BEIJING: China is poised to quicken spending on infrastructure projects while the central bank supports with modest easing steps, as risks from the Delta variant and floods threaten to slow its recovery, policy insiders and analysts said.

Chinese leaders are seeking to prevent a sharper growth slowdown in the second half that could lead to layoffs, but there is little appetite for them to ramp up stimulus that could undermine a long-term push to tackle debt risks, they said.

China's economy has rebounded to its pre-pandemic growth levels driven by surprisingly strong exports, but the expansion is losing steam, with softness in consumption and investment.

Last week, a meeting of the Politburo, a top-decision making body of the ruling Communist Party, pledged to maintain an accommodative stance in the face of an uneven domestic recovery and global uncertainty.

"The downward pressure on the economy is increasing but we have enough policy tools to deal with it," said a policy source who advises the government. "Fiscal policy will be more effective in providing targeted support for the economy."

The economy is on track to grow more than 8per cent this year but analysts say pent-up COVID demand has peaked and forecast that growth rates are starting to moderate.

China's manufacturers are grappling with higher raw material prices and global supply chain bottlenecks. Meanwhile, the global spread of the Delta variant and outbreaks of cases at home, on top of recent heavy rainfall and floods in some Chinese provinces have disrupted business activities.

Local governments have more space to quicken bond issuance to fund big-ticket projects, after a slow start this year as officials sought to control debt risks while approving projects under the 14th five-year plan (2021-2025), analysts said.

Net local government special bond issuance reached 1.01 trillion yuan (US$156.3 billion) in the first half, accounting for 28per cent of the annual quota, finance ministry data showed.  

"We think that this implies that the issuance of provincial government special bonds is bound to accelerate in the second half to help boost investment. This fiscal policy cushion is likely to support growth in H2," said Li-Gang Liu, chief China economist at Citigroup.

Growth of China's infrastructure investment slowed to 7.8per cent in the first six months from 11.8per cent in January-May.

But top leaders at the Politburo meeting hinted that some of the funds raised from bond issuance may only be used in late 2021 or early next year, when an important leadership reshuffle takes place.

MODEST POLICY EASING

The People's Bank of China will likely provide a supporting role in the second half, policy insiders and analysts said. There is scope for it to deliver another RRR cut this year to boost liquidity, which will help local governments sell bonds.

Effective July 15, the cut to banks' reserve requirement ratio (RRR) will release around 1 trillion yuan in long-term liquidity to underpin growth.

But the PBOC may have to tread cautiously in cutting interest rates at a time when the Federal Reserve is considering tapering stimulus, which could increase capital outflows from China and add pressure on the yuan, analysts say.

"If the Fed tightens policy, we won't loosen policy aggressively as that could fuel capital outflows and put pressure on the exchange rate," said Zong Liang, chief researcher at Bank of China.

The PBOC had been scaling back COVID-driven stimulus to curb debt risks while maintaining targeted support for small firms. Growth of total social financing, a broad measure of liquidity and credit, slowed to 11per cent in June from a near three-year high of 13.7per cent in October 2020.

(US$1 = 6.4633 Chinese yuan)

(Editing by Jacqueline Wong)

Source: Reuters

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