Analysis – China to step up policy measures to revive economy, but no ‘bazooka’ stimulus seen By Reuters

By Kevin Yao

BEIJING (Reuters) – Chinese policymakers are likely to step up measures to at least help the economy meet an increasingly difficult growth target for 2024, analysts and policy advisers say, with a stronger focus on boosting demand to combat persistent deflationary pressures.

Official data showed the world’s second-largest economy slowed broadly in August, fueling expectations for more stimulus. President Xi Jinping recently urged authorities to work hard to meet the country’s annual economic targets, signaling Beijing remains committed to reaching its target of around 5 percent GDP growth.

Policymakers are navigating a complicated economic landscape, with China’s reliance on infrastructure spending to spur growth exacerbating debt risks. Excessive domestic investment amid weak demand has also fueled deflationary pressures, which have already pushed prices lower and forced companies to cut wages or lay off workers to cut costs.

“We need to strengthen fiscal policy, which is more effective in tackling deflation, while adjusting monetary policy to keep it accommodative,” said a political adviser on condition of anonymity.

The Federal Reserve’s interest rate cut on Wednesday, which kicked off the US easing cycle, will create more room for the People’s Bank of China (PBOC) to cut interest rates and banks’ reserve requirements. The PBOC may also cut interest rates on existing mortgages to help homeowners, analysts said.

In addition, China may step up its spending. Local authorities have stepped up bond issuance to help finance the construction of major projects, alongside increased central government debt issuance to support key strategic sectors.

While policymakers may count on a combination of fiscal stimulus and monetary easing to spur growth, a key meeting of the ruling Communist Party in July reaffirmed a stronger focus on the supply side. This suggests that strong measures to address weak consumer demand and deepening deflationary risks are unlikely in the near term.

“They (policymakers) will step up their efforts because they are not willing to accept lower growth,” said Xu Hongcai, deputy director of the economic policy committee at the state-backed Chinese Political Science Association.

“But any strong stimulus seems unlikely.”

In recent years, China has relied on increased spending on infrastructure and manufacturing to support growth, with the central bank steadily reducing borrowing costs.

RISK GROWTH TARGET

China’s growth target of around 5% for 2024 allows for some flexibility. However, weakened growth in recent months has led several global brokerages to cut their forecasts below this target.

China, which has rarely missed its growth target, last missed its growth target in 2022 when the pandemic pushed growth to 3 percent in 2022, well below the target of about 5.5 percent.

“More stimulus is urgently needed,” said Xing Zhaopeng, ANZ’s senior China strategist. “Political thinking seems to be changing from supply to demand. There will be a significant boost to household demand and public consumption.”

Morgan Stanley analysts predict that China will use the fiscal expansion to increase spending on social security such as health care, education and public housing, which would help reduce precautionary savings and boost consumption.

ANZ has put together a stimulus package – which includes benefits from expected mortgage interest rate cuts and efforts to boost housing and consumer goods exchanges – which could generate 0.2% of GDP. But it still maintains its 2024 growth forecast of 4.9%.

Earlier this month, former central bank governor Yi Gang made unusually strong comments urging action against deflationary pressure.

China’s GDP deflator, the broadest measure of prices for goods and services, has fallen for five consecutive quarters – the longest deflationary streak since 1999.

The measure is expected to remain negative for a sixth quarter in July-September, with producer price deflation deepening and consumer prices remaining sluggish.

Any sudden resurgence in consumption remains doubtful amid job and income insecurity.

“To pull the economy out of the downward deflationary spiral, much more is needed, particularly from a fiscal point of view, to reduce local government debt pressure,” analysts at Societe Generale (OTC:) said in a note.