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As headwinds rise, China plans to open stimulus taps again

China fiscal stimulus
China plans fiscal stimulus for stable economic growth in 2022

Bucking the global trend of withdrawing stimulus measures, Japan’s Prime Minister Fumio Kishida has unveiled a record breaking $490 bn mega fiscal package in November, to deliver necessary aid to the public and boost pandemic recovery.

After Japan’s announcement, China is next in line from Asia, ready for another big push in fiscal stimulus.

The China’s finance ministry has vowed on Monday to roll out fiscal policies in 2022, amid mounting downward pressure on the economy. Not only that, but the ministry said it has plans for greater cuts in taxes and fees to support struggling businesses, that will exceed the estimated $157 bn in reductions in 2021.

Beijing also seems committed to using the accommodative monetary approach to battle stagflation and reflate growth. The People’s Bank of China announced on Monday that it ‘will use a variety of monetary policy tools to keep liquidity reasonable and ample and ensure credit growth is stable.’

In its 2022 planning conference, the PBOC further stated that it will step up oversight of capital and platform companies, and steadily implement a management system for real estate financing.

As the economic downturn threatens to hamper growth, market analysts have anticipated this news of renewed fiscal support out of China for some time now. Recent key economic data suggested poor performance of the nation’s growth momentum, which has only strengthened the case for fiscal stimulus. As per market analysts, this will be needed to keep mainland growth close to 6% in the next few years.

Where International Monetary Fund (IMF) has estimated a 5.6% expansion for the Chinese economy in 2022, most American investment banks like BofA Global Research, Goldman Sachs and JP Morgan, have predicted growth of less than 5% for 2022. In the meanwhile, government sources told Nikkei Asia that they are considering lowering China’s 2022 economic growth target to 5.5% to 6%, from an earlier goal of 6% or more.

In an investment outlook dated 21 December, Eurizon Asset Management analysts explained that the China economic policy decisions and a few growth supportive stimulus measures, could reverse the trend of the Chinese Stock market.

“Foreign investors’ assessment of China will also depend heavily on whether or not the Xi administration will want to press forward with its anti-market regulatory action, initiated last summer.”

Beijing aims to increase support for growth

There has been an increase in government support for the economy. The development of stimulus targets comes after authorities recently set 2022 targets on counteracting growth pressures and stabilizing the economy.

The finance ministry last week issued $229.21 bn in the 2022 advance quota for local government special bonds, in order to help spur investment and support the economy.

As the curbs led property downturn is affecting China’s economic growth, PBOC also announced a cut in its lending benchmark loan prime rate (LPR) for the first time in 20 months on December 20. Where the five-year loan prime rate remained unchanged at 4.65%, the one-year loan prime rate came down to 3.8%, from 3.85%. Furthermore, just a few days before that, PBOC also cut to the reserve requirement ratio for most banks for the second time the year, releasing $188 bn in long-term liquidity to bolster slowing economic growth. 

China’s leadership has recently shifted its focus towards stability for 2022, for stabilising macroeconomic conditions. As per economists, Chinese authorities are drawing on all possible options, so as to achieve the country’s growth targets for the next few years. This is on the backdrop of fading economic growth, particularly during the second half of 2021. While curbs on the property industry are likely to remain, economists also expect fewer regulatory surprises compared with the wide-ranging regulations and reforms in 2021.

The world’s second-largest economy is facing multiple challenges heading into 2022, amid a looming corporate debt crisis, property market slump, slower industrial output and muted consumer spending.

China wide-ranging regulatory clampdowns on various sectors have already dampened investment growth, while retail sales growth that weakened to 3.9% in November also pointed towards an economic slowdown. An additional threat is the re-appearance of Covid-19 cases and the new omicron variant, leading to fresh restrictions and port congestions, that could affect export demand pressure growth, besides hitting global supply chains.