China Likely to Rely on Fiscal Stimulus Measures for Economy

(Bloomberg) -- Economists expect China’s government to rely more on fiscal stimulus to boost the economy out of the current slowdown, due to the limitations faced by the central bank.

"The restrictions on monetary policy are obvious," Guo Lei, analyst at GF Securities Co, wrote in a note, pointing to widening yield spreads with the U.S. and clogged policy transmission in the domestic market. "For fiscal policy, there’ll be but two directions. One is tax reduction, the other is resuming fiscal spending and infrastructure."

On Wednesday, the nation’s Politburo said that due to increasing economic pressure, more "preemptive and prompt" steps to shore up the economy are needed. Here’s a list of policy tools that China can use:

Tax Cuts

  • Policy makers have pledged to further cut value-added and personal income taxes
  • Economists also expect the government to cut corporate income taxes and social security premiums to lower the burden on companies
  • CICC: "We estimate that a two percentage points cut to the VAT rate in the top bracket corresponds to a 0.4 percentage point reduction in weighted-average effective VAT tax and a total of 400 billion yuan ($57 billion) in tax cuts"
  • ANZ’s Raymond Yeung: "Tax cuts, or at least some sort of tax reforms, will be the focus"
  • Societe Generale’s Michelle Lam:"The key focus of easing will be on tax cuts to support the corporate sector," as well as more monetary policy support and some infrastructure stimulus

Bigger Deficit

  • Bigger tax cuts will probably lead to a higher budget deficit
  • Economists estimate China’s actual deficit ratio will rise to 3.8 percent in 2019, according to a Bloomberg survey
  • CICC: "We estimate that the deficit ratio will need to rise 0.4 percentage point from 2.6 percent in 2018 to 3 percent in 2019" if the VAT rate for the top bracket is cut by two percentage points
  • UBS’s Wang Tao: "We expect the augmented fiscal deficit to widen by only 0.5 percentage point in 2019, compared to two percentage points in 2016"

Off-budget Bonds

  • China has massive ammunition in its off-budget spending, such as local government special bonds
  • The quota for special bonds may need to rise further in 2019 from the 1.35 trillion yuan in 2018
  • With funding via shadow banking being tightly controlled, special bonds are an important tool for local officials to raise funds for infrastructure projects
  • UBS’s Wang: "More explicit government spending" may come after the economic data deteriorates further, perhaps in mid-December or later

Reserve-Requirement Ratios

  • The PBOC could further lower the reserve requirement ratio, which is the money banks must keep on hand. Such cuts can supply cash as the current account surplus shrinks, reduce banks’ costs and help them roll over mounting MLF loans
  • ANZ’s Yeung: "The PBOC will use the triple-Rs in order to guide funding to SMEs"
  • ING’s Iris Pang: "What the central bank can do is, for example, every quarter there will be an RRR cut of one percentage point."

Easier Credit Policy

  • The PBOC and other regulators could work to unclog policy transmission by reducing corporate financing costs and removing hurdles for banks to lend more
  • Citi’s Liu Li-gang: The government appears to have taken private companies’ financing difficulties seriously since October, and some further actions to address their access to bank loans and capital markets can be expected
  • ANZ’s Yeung: "What we are expecting is some sort of window guidance, so the regulators will encourage commercial banks to support SMEs"
    • One question is "are they going to change the risk weighting or the capital requirement for banks, if they can prove that they are going to support high-quality SMEs or high-quality assets in the private sector?"

No Relaxation on Home Purchases Rules

  • Changes to property price controls weren’t mentioned in the statement
  • Economists doubt if any relaxation in home purchase is coming soon
  • ANZ’s Raymond Yeung: falling property prices in some cities "offers some leeway for the government to think about relaxing some of the property tightening measures"
    • Property bubbles still a risk; Any relaxation of property tightening "will be very selective and geographically-specific"

Spiritual Support

  • Policy makers are likely to talk up their support for reforms
  • UBS’ Wang: Statements of the "senior leadership’s strong and unequivocal support" for the private sector and commitment to market-oriented reform and further opening will likely boost business confidence
    • This message can be enhanced greatly with a few landmark cases of mixed-ownership reform for state firms, where private investors buy equity in state-owned enterprises.

©2018 Bloomberg L.P.