China Signals Ramped-Up Stimulus as Coronavirus Impact Widens
China’s top leaders pledged to widen the fiscal deficit and sell sovereign debt, signaling that Beijing is preparing larger-scale stimulus to counter the economic fallout from the coronavirus.
China will increase its fiscal deficit as a share of gross domestic product, issue special sovereign debt and allow local governments to sell more infrastructure bonds as part of a package to stabilize the economy, according to a Politburo meeting on Wednesday, Xinhua reported late Friday.
No other details of the fiscal stimulus were given in the report. China hasn’t released its budget for 2020 because the health crisis has delayed a key political meeting. The official deficit hasn’t exceeded 3% of economic output for more than a decade.
With output crippled by factory shutdowns and transport curbs this quarter, China’s economy is now threatened further by a collapse in external demand due to the spread of the deadly disease around the world. That’s prompting a shift by policy makers who until now have stuck to a stimulus plan far more modest than those being rolled out by global counterparts.
The announcement could mean “much larger fiscal deficits and local-government special bond issuance quota in 2020, and a cut to benchmark deposit rates in the near term,” economists including Lu Ting, chief China economist at Nomura International Ltd in Hong Kong wrote in a note. “Due to the unique nature of the virus-led shock and Beijing’s limited policy space, we believe Beijing will likely forgo a massive stimulus package on par with those launched during the 2008-09 and 2014-16 easing cycles.”
China’s use of “special” debt at a national or local level refers to the fact that the bonds are accounted for outside the regular budgets, and are a way to target the proceeds at specific purposes like infrastructure investment.
“Economic development, especially the resumption of supply chains, is facing new challenges as imported virus cases rise,” the report said, citing the meeting. “Stronger macro measures to offset the blow are needed to expand domestic demand.”
The meeting also reiterated China will meet its goal of building a “moderately prosperous society” this year.
In a separate statement published late Friday, the People’s Bank of China called for better coordination of global macro policies, while re-emphasizing it will keep liquidity sufficient to help with the real economy and watch out for inflation risks.
Economic activity in China collapsed in the first quarter as the government shut most of the country to counter the spread of the coronavirus. Economists have lowered their median forecast for economic growth to 2.9% for 2020, the slowest pace since 1976, when the Cultural Revolution wrecked the economy and society.
The Politburo’s moves signal an escalation in China’s measured and targeted approach to stimulus, bringing it more in line with global efforts to stem the economic damage. President Donald Trump signed the largest stimulus package in U.S. history on Friday, a $2 trillion bill intended to rescue the coronavirus-battered economy.
While details weren’t available, a higher deficit in general can ease local governments’ revenue stress and provide room for more tax cuts and infrastructure investment.
China has issued special sovereign bonds twice before -- once in 1998 to recapitalize state banks in the wake of the Asian financial crisis and again in 2007 to set up China Investment Corp., when funds came from foreign-exchange reserves.
By selling special sovereign bonds, top policy makers are opting to expand the balance sheet of the central government because it is in a relatively better fiscal situation than local authorities.
The debt sales would need approval from the legislature, whose standing committee is set to meet in April.
Economists at Citigroup Inc. including Liu Li-Gang wrote in a note that the announcement heralds “a big stimulus package” centered around a deficit of 3.5% of GDP and tax reductions of 2.5 trillion yuan ($352 billion), as well as special local debt boosted to 3.5 trillion yuan from 2.15 trillion yuan in 2019. Monetary policy could see cuts to market rates and further lowering of the reserve ratio.
“We think that the government will have to rely on investment policy tools to buttress growth, and we see a big push in both traditional and new infrastructure investment as highly probable,” they wrote. “we are confident of an investment-led recovery in the remainder of the year.”
©2020 Bloomberg L.P.