(Yicai) April 23 – The Chinese government should roll out stronger fiscal policies in response to the pressure from the US government’s Reciprocal Tariffs, and in particular it should introduce more targeted support to stabilize foreign trade, jobs and the real estate market, as well as spur consumption to drive domestic demand, financial experts said.

Now that the US’ Reciprocal Tariffs are in place, China will undoubtedly roll out macroeconomic policy countermeasures at a faster pace, said Feng Lin, executive director of the research and development department at Golden Credit Rating International. Considering the tough external trade environment, the state of the real estate market and inflation levels, China could launch some "extraordinary counter-cyclical adjustments" in the second quarter.

In April, the US slapped steep new tariffs on China, prompting retaliation from Beijing. China’s cabinet emphasized the need for more proactive and effective macro policies during a meeting with economic experts and business leaders on April 9. The State Council highlighted the importance of introducing new stimulus measures in a timely manner to effectively respond to the uncertainties in the global environment.

When external demand weakens, the government needs to quickly adjust the fiscal budget to ramp up spending, thereby expanding overall demand, Luo Zhiheng, chief economist at Yuekai Securities, told Yicai. This approach aims to ensure job stability and avoid a substantial short-term hit on people’s income and spending power.

Strong Spending

China has implemented a more proactive fiscal policy since the start of the year, aimed at boosting domestic demand and promoting consumption so as to stabilize the economy, and the measures are starting to show results.

China's broad fiscal expenditure, which includes the general public budget and government fund expenditures, climbed 5.6 percent in the first quarter from a year earlier to CNY9.3 trillion (USD1.2 trillion), according to the latest data from the Ministry of Finance. This growth rate matches the economic growth rate of 5.4 percent for the quarter. 

General public budget expenditure nationwide advanced 4.2 percent in the first three months year on year to CNY7.2 trillion (USD987.8 billion). In March alone, it jumped 5.7 percent, mainly due to big increases in spending on social security, employment, education and other areas related to people's livelihoods, said Luo.  

Broad infrastructure investment soared 11.5 percent in the first quarter from a year earlier, supported by special bond funds and other sources. Net financing of government bonds surged 186 percent in the first quarter from the same period last year to CNY3.8 trillion (USD521.3 billion), according to data from the People’s Bank of China.

"Although government revenue was on the weak side in the first quarter, spending remained strong thanks to the faster rollout of government bonds at the start of the year, which gave fiscal funds a much-needed boost," said Feng. 

Faster infrastructure spending helped offset the decline in real estate investment, and was the main factor driving overall investment growth, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

Additional Stimulus

If the US fully enforces its current tariff rates on China, China-US trade would essentially grind to a halt, said Yuan Haixia, director of China Chengxin International Credit Rating’s research institute. This could shave around 2 percentage points off China’s GDP growth and could require additional government spending of between CNY1.5 trillion (USD205.7 billion) and CNY2.9 trillion.

The government is likely to step up its efforts to stabilize growth through fiscal measures this year, Feng said. In addition to the CNY300 billion (USD41.1 billion) in ultra-long special treasury bond funds already earmarked to help the trade-in of durable consumer goods, the government might expand the scheme to include more everyday goods and services. 

"China's exports to the US have only been around USD500 billion a year in recent years. This is around 7 percent to 8 percent of domestic goods consumption. So as long as the country effectively spurs domestic consumption, it can fully offset the drop in exports to the US," said Feng. "Our estimate is that in order to make up for the slowdown in external demand, fiscal support for consumption this year needs to increase from CNY300 billion to between CNY700 billion (USD9.6 billion) and CNY1 trillion."

With regard to stabilizing the real estate market, Luo said the government could issue more treasury bonds and explore the establishment of a "Real Estate Stabilization Fund" with an initial scale of around CNY2 trillion (USD274.2 billion). This fund would be specifically used to ensure the on-time delivery of pre-sold homes, buy up housing inventory and manage idle land held by developers.

Editor: Kim Taylor