Beijing likely to rely more on fiscal stimulus measures: economists

Beijing

ECONOMISTS expect China's government to rely more on fiscal stimulus to lift 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 United States 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 "pre-emptive and prompt" steps to shore up the economy are needed.

Here's a list of policy tools that China can use:

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. "Tax cuts, or at least some sort of tax reforms, will be the focus," said ANZ Greater China chief economist Raymond Yeung.

According to CICC's estimate, 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 (S$79 billion) in tax cuts.

Bigger tax cuts will probably lead to a higher budget deficit. Economists estimate China's actual deficit ratio will rise to 3.8 per cent in 2019, according to a Bloomberg survey. UBS's Wang Tao said: "We expect the augmented fiscal deficit to widen by only 0.5 percentage point in 2019, compared to two percentage points in 2016."

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. Said UBS's Mr Wang: "More explicit government spending" may come after the economic data deteriorates further, perhaps in mid-December or later.

The People's Bank of China (PBOC) could further lower the reserve requirement ratio (RRR), 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 (medium term lending facility) loans. "What the central bank can do is, for example, every quarter there will be an RRR cut of one percentage point," said ING Greater China economist Iris Pang.

The PBOC and other regulators could work to unclog policy transmission by reducing corporate financing costs and removing hurdles for banks to lend more. "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," said Citi's Liu Li-gang.

Changes to property price controls weren't mentioned in the statement, so economists doubt if any relaxation in home purchase is coming soon.

Policy makers are likely to talk up their support for reforms. "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 confidence," added UBS' Mr Wang. BLOOMBERG