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What to Watch for in China Stimulus as Virus Impact Hits Economy

Economists from Goldman Sachs to UBS see more easing steps ahead.

What to Watch for in China Stimulus as Virus Impact Hits Economy
A pedestrian walks past the People’s Bank of China (PBOC) headquarters in Beijing, China. (Photographer: Qilai Shen/Bloomberg)

(Bloomberg) --

Chinese policy makers will likely roll out more measures to support the economy amid the impact of closures to fight the spread of the coronavirus, though the emphasis still lies on not over-doing it.

Economists from Goldman Sachs Group Inc to UBS Group AG and BNP Paribas SA see more easing steps ahead, including further cuts to central bank funding rates and more tax relief to hard-hit sectors.

While officials can act swiftly, they’re still wary of re-inflating debt bubbles or using up ammunition that might be needed should the trade conflict with the U.S. worsen again. Inflation pressure complicates the setting further.

“The authorities will have to consider the after-effect of their policies, which may have pro-cyclical influence in the second half when the economy recovers and adds to the difficulty of debt containment,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Bank Ltd.

Here are the next steps investors should watch for:

Sufficient Liquidity

The addition of more interbank funding is likely via open market operations and the medium-term lending facility later this month, especially toward the end of February when delayed tax payments are due.

In addition, as open market operations are mostly for major banks, some economists also expect the People’s Bank of China to cut the proportion of deposits banks must hold as reserves. The PBOC has itself hinted that, at the least, reserve cuts aimed at specific sectors are on the way.

Lower Rates

Liquidity injections coupled with lower funding costs this month have nudged down interbank rates, with the key 7-day repo rate falling almost 45 basis points. PBOC Deputy Governor Pan Gongsheng has also signaled further cuts to the rate on the PBOC’s medium-term loans, a policy tool that drives the cost of borrowing for companies and households. As there is no such operation scheduled for the first quarter, action could come on an ad-hoc basis.

Taxes and Expenditure

While fiscal stimulus may not take a lead role in this round of easing, more spending on infrastructure is still likely, especially on health-related areas. The authorities have delayed or partially waived taxes and social security fees for affected businesses, as well as encouraging private landlords to exempt rents. Some of those measures will likely continue after the virus is brought under control.

Large-scale tax cuts are less likely, as public funds were stretched even before the virus hit. That said, the actual deficit came in lower than projected last year, meaning that in theory there’s some room to use that borrowing in 2020 to combat the virus impact.

Bazooka Tools

For some major fiscal steps, including a bigger deficit, the government may technically need approval from the National People’s Congress, the rubber-stamp legislature that is still set to meet in March.

The outlook for more powerful monetary tools is complicated by the ongoing reform of the policy framework. The bluntest instrument, the one-year lending rate which could slash borrowing costs across the economy, is being scrapped in favor of a more market-led system.

However, the counterpart deposit rate is still in place, and that could be shifted to reduce the cost of maintaining deposits and help bank margins. PBOC adviser Ma Jun suggested such a step this week.

The stimulus area where officials tread most carefully is the property market, given the history of price inflation. Even so, according to Goldman Sachs, if the virus is not brought under control by May and travel restrictions persist into the second quarter, the government may be tempted to ease controls there as they did in 2015 and 2016.

“In this more serious scenario, additional policy support would be required to put a floor under GDP growth” including some easing at the national level in the property market, Goldman economists including Hui Shan wrote in a note.

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Malcolm Scott

©2020 Bloomberg L.P.

With assistance from Bloomberg