BEIJING (Reuters) – China should rely more on fiscal policy to support the economy as downward pressure sharply increases, a senior central bank researcher said on Tuesday, as debate grows over whether Chinese authorities are considering more sweeping stimulus measures.
With the economy growing at its weakest pace since the global crisis, authorities are widely expected to decide on further measures soon on top of recent steps to spur bank lending, cut taxes and fast-track infrastructure projects.
But business conditions are still expected to get worse before they get better — and higher U.S. trade tariffs are looming from Jan. 1 — raising questions among China watchers over how much support will be needed to stabilize the economy, let alone turn it around.
“Monetary policy is more effective in curbing economic overheating than stimulating growth,” Xu Zhong, head of the PBOC’s research bureau, said at a finance forum in Beijing.
“Our country should implement more active fiscal policy. There is ample room for fiscal policy. The pro-active fiscal policy should focus on boosting infrastructure investment.”
The People’s Bank of China (PBOC) has slashed banks’ reserve requirements four times this year, and financial markets are wondering if it is considering more aggressive steps such as a cut in its benchmark lending rate.
China had cut benchmark rates systemwide several times in the last downturn in 2014-15. But policymakers have opted for more modest, targeted measures since which they believe are better able to direct cash to parts of the economy facing the biggest strains.
Chinese economists have been debating whether the government should expand its fiscal deficit ratio beyond 3 percent next year.
But Xu cautioned against fiscal stimulus that was too forceful. China’s policymakers have been working for several years to tackle a mountain of debt left over from past stimulus binges.
The downward pressure on the economy is caused partly by previous policy adjustments, including property controls to cool home price rises and curbs on local government debt, Xu said.
Qualified local governments should be allowed to issue more debt via the “front door”, or official channels, to fund infrastructure projects, he added.
But a rebound in infrastructure investment alone would not solve all of China’s economic woes, analysts at Societe Generale said in a recent research note.
Consumer spending is faltering and property sales are falling, while Chinese exports to the United States are expected to slide soon as higher U.S. duties start to bite, SocGen said, adding that many companies continue to have trouble getting affordable financing despite official credit easing measures.
Xu also said China should improve its short-term demand management, adding that it should strengthen policy coordination and avoid “one-size-fits-all” policies.
“When the economy is going downward, recovery should precede reforms. Only when the economy operates normally, reforms can be pushed forward effectively,” Xu said, pointing to how the U.S. government dealt with the global crisis.
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