[Exclusive] China May Issue New Economic Stability Policy Soon, Economist Says
DATE:  Mar 27 2020
/ SOURCE:  yicai
[Exclusive] China May Issue New Economic Stability Policy Soon, Economist Says [Exclusive] China May Issue New Economic Stability Policy Soon, Economist Says

(Yicai Global) March 27 -- The global economy is facing the risk of recession as the coronavirus pandemic spreads worldwide, and China is therefore stepping up its policy measures, according to Lian Ping, chief economist and head of Zhixin Investment Institute, a unit of Xinhu Wealth Investment and Management. The government is expected to issue a new policy to ensure economic stability.

The policy is in the works, and will likely be issued by the end of this month, or the start of next month, Lian noted in an exclusive interview with Yicai Global.

Fundamentally, China's economy still has a lot of growth potential, such as a relatively low urbanization rate, rapidly-advancing regional economic integration and plenty of room for reforms of rural economic systems. So Lian believes that an economic rebound can be expected amid increased policy efforts once the global pandemic eases. It's just that it's impossible to say how strong the rebound will be.

Economic Stimulus

Lian said he was confident about a rebound in China's economic growth in the post-epidemic period when Covid-19 is merely affecting the domestic market. He believes that the country can still achieve its pre-set annual growth goals, and both investment and consumption will recover after the outbreak is under control. China can retrieve some of its losses incurred due to the epidemic by the end of the year.

The second round of impact brought by the global spread of Covid-19, however, will cause overall world demand to contract, abruptly increasing pressure on China's exports, which will lead to a marked increase in uncertainties surrounding the economic outlook, Lian said. So more stimulus is needed to spur the economy.

He suggested that fiscal and monetary policy should be two-pronged; fiscal policy needs to be more active, and monetary policy more relaxed. Lian believes the government also needs to support a series of major projects, aid small and micro firms with special loans and support inclusive finance.

As a result, he expects China's bank credit growth to be significantly higher this year than it was in 2019.

Fiscal Expansion

The government's debt ratio is lower than 60 percent, which is below the international alert line, and much lower than the United States, Europe and Japan, Lian said, referring to the room for policy adjustments. Both the central and local governments still hold a huge amount of idle funds and other usable resources, including corporate equities and land. So China can afford further fiscal expansion to support infrastructure-related investment and consumption as well as targeted tax and fee cuts.

Lian suggested that the fiscal deficit ratio this year should be raised to above 3.5 percent, while the value of local governments' special bond issuance can be boosted to over CNY3 trillion (USD423.6 billion).

The 2019 fiscal deficit ratio set by the National People's Congress last March was 2.8 percent, with plans to collectively issue local government special bonds worth CNY2.15 trillion. But due to the Covid-19 outbreak, this year's NPC has been postponed, without no new date specified.

The People's Bank of China will need to promote the further reduction of actual interest rates and the cost of social financing in the near future, to better support the real economy, Lian pointed out, adding that the central bank should implement targeted reserve requirement ratio cuts, targeted re-lending and re-discount as well as other structural adjustments.

China still has some room for RRR cuts amid a drop in consumer prices, stabilized exchange rate of the Chinese yuan and the smooth switch of loan interest rates to the new Loan Prime Rate mechanism, the economist added.

He expects cumulative RRR cuts of between 100 and 250 basis points this year, or two or four downward revisions. Simultaneously, the Medium-term Lending Facility interest rates operated by the central bank in the currency market as well as the benchmark LPR rate will also see slight downward adjustments.

The PBOC has generally cut the RRR of commercial banks by 50 basis points at the beginning of January, and it also slashed that of banks meeting the assessment standards by 50 to 100 basis points in the middle of this month.

But Lian pointed out that China's current interest rates are already low compared with the level of its economic growth. For example, commercial banks' benchmark deposit rates have been lower than they were during the 2008 financial crisis. So he does not expect interest rates to continue falling sharply.

Yuan Appreciation

Lian believes that the yuan will tend to rise steadily in the long run, with fluctuations around 7 to the US dollar in the short term, while the possibility of it falling below 7.2 is not large. As China's economy still has significant development potential in the long run, there is no basis for the continuous depreciation of the yuan exchange rate.

The exchange rate can still have steady upward momentum in the short term, if China's economy starts a V-shaped recovery post-epidemic and the government unveils a strong package of policies to support growth, according to the economist.

From the perspective of the balance of payments, Liang said China's commodity exports will generally contract due to the impact of the global recession, while imports will remain at a low scale, which will lead to a significant reduction in the trade surplus of goods. But China's service trade deficit will also be trimmed as a result of the second outbreak round's impact, which will partly offset a reduction in the trade surplus in commodities.

Last year, China's trade surplus in goods was USD469.8 billion and its service trade deficit was USD261.4 billion, with the latter accounting for 56 percent of the former. And tourism contributed more than 80 percent of the service trade deficit. The Covid-19 epidemic will seriously affect this part of foreign exchange expenditure, resulting in a significant reduction in the service trade deficit, Lian said.

Foreign direct investment may slow significantly this year in the context of the global recession, he added However, the smooth running of China's economy could attract faster inflows of financial capital. As a result, the country's international balance of payments in 2020 is likely to remain in surplus, which can still help the yuan rise steadily despite some fluctuations.

The world's confidence in the Chinese market will increase as the epidemic in China is gradually brought under control, said Lian. Coupled with recent relatively abundant liquidity abroad, some overseas investors and institutional investors are expected to gradually increase the allocation of yuan currency assets.

Editors: Tang Shihua, Peter Thomas

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Keywords:   Economic Stimulus Package,Fiscal Policy,Foreign Exchange Market,New Coronavirus Pneumonia