Opinion

Goodbye deleveraging: Fiscal and monetary expansion to support growth in China

China has opted for a renewed fiscal and monetary stimulus to address the risk of the US-led trade war. The dual policies send a clear signal that economic growth is the priority, but such measures do not come without a cost. Deleveraging efforts will have to be put on hold for the time being.

By: , and Date: August 23, 2018 Topic: Finance & Financial Regulation

This piece has been published in

Against very clear headwinds due to the trade war and decelerating investment, China’s State Council has unveiled plans to take a more aggressive fiscal policy in 2018 with a reduction of corporate and household burden by 1.1 trillion yuan. In the whole year, tax reduction will amount to 800 billion yuan for enterprises and individuals, which is equivalent to 5.5% of total tax revenue in 2017. This includes the adjustment in value added tax, the reduction in corporate tax rate of manufacturing, transportation, and other industries, and the rebate from research and development expense. Another 300 billion yuan will come from reducing non-tax burden on costs in logistics and utilities. The total amount is roughly equivalent to the reduction in corporate burden from the US tax reform of $150 billion (1 trillion yuan).

Such incentive does not come without cost. On the funding side, the Chinese government will accelerate the issuance of local government special bonds for infrastructure financing. Such action is echoed by the People’s Bank of China (PBoC) through the earlier three cuts in the Reserve Requirement Ratio (RRR). It is also reported that Chinese banks will have a laxer “structural parameter” in the Macro Prudential Assessment (MPA), which essentially means more room for credit growth.

The dual fiscal and monetary policies send a clear signal that economic growth is the priority. An expansionary fiscal policy and a reduction in tax revenue mean stronger government intention to support the economy. But without facilitating measures, the new fiscal package will have to drive up interest rate and crowd out private investment. This is where monetary policy comes into place.

There are two consequences of the changed monetary tones. First, a faster credit growth can maintain abundant liquidity and low interest rate to support the private sector. The earlier three RRR cuts and expanding types of MLF collaterals already suggested an accelerated liquidity easing tone, with which the market quickly reacted with a rapid renminbi depreciation. The liquidity condition in conventional markets, such as the interbank and bond market, has also improved. SHIBOR 3M, the interest rate offered by 18 commercial banks in the interbank market, moved down from 4.91% in December 2017 to 3.17% in July 2018. This indicated the liquidity pressure for financial institutions, especially the large banks has eased.

Second, laxer monetary condition can ease the default risks due to liquidity crunch, which is particularly important against the backdrop of the recent crackdown on shadow banking. The reduced risk appetite of investors and the concern on more defaults also push the PBoC to include lower rated assets as the collaterals of the MLF.

Another recent development that undermines the risk appetite of investors is the problematic peer-to-peer (P2P) lending. The growth of P2P lending has plateaued at 956 billion yuan as of July 2018. And the number of normal operating platforms for online loans fell to 1,645 due to liquidity pressure and problem in asset quality, hampering the confidence of the financing channel. Together with the rising bond default risks, this has made the financing conditions for small corporates even more difficult.

Whilst total social financing seems to have stabilised so far, down the road, we expect it to accelerate in the second half of 2018 as a consequence of the RRR cuts and the MLF expansion. All of this is necessary to avoid higher rates making it even more difficult to finance the fiscal stimulus and to reduce the crowding out of private investment. All in all, China has opted for a renewed fiscal and monetary stimulus to address the risk of the US-led trade war. Forget about deleveraging efforts for the time being.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More on this topic

Opinion

Sticks and carrots from China’s leadership to Chinese banks

The takeaway from the 13th National People's Congress (NPC) is clear: under the current economic downturn, Chinese authorities will do whatever it takes to support the real economy. Alicia García Herrero and Gary Ng reflect on the "sticks snd carrots" approach to Chinese banks.

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: March 21, 2019
Read about event More on this topic

Past Event

Past Event

The trade crisis: good and bad scenarios and the EU's response

What role will the EU play in the resolution of the global trade crisis?

Speakers: Uri Dadush, Maria Demertzis and Denis Redonnet Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 20, 2019
Read article More on this topic More by this author

Opinion

China’s debt is still piling up – and the pile-up is getting faster

With looser monetary policy, China's policymakers hope to encourage banks to lend more to the private sector. This seems to imply a change from the deleveraging drive begun in mid-2017. Although this should be good news for China's growth in the short term, such a continued accumulation of debt cannot but imply deflationary pressures and a lower potential growth further down the road.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: March 19, 2019
Read article More by this author

Opinion

New EU industrial policy can only succeed with focus on completion of single market and public procurement

France and Germany recently unveiled a manifesto for a European industrial policy fit for the 21st century, sparking a lively debate across the continent. The fundamental idea underpinning the manifesto is a good one: Europe does need an industrial policy to ensure that EU companies remain highly competitive globally, notwithstanding strong competition from China and other big players. However, the Franco-German priorities are unsuitable for the pursuit of this goal.

By: Simone Tagliapietra Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: March 18, 2019
Read article More on this topic More by this author

Opinion

Tense transatlantic relations put EU in tough spot

The global multilateral system is being challenged by the US and China, which prompts the EU to rethink how well it can compete in the world.

By: Maria Demertzis Topic: Global Economics & Governance Date: March 5, 2019
Read article More on this topic More by this author

Blog Post

The possible Chinese-US trade deal

The future of Sino-American relations after the incoming end of trade talks between Beijing and Washington. We review opinions in the English-speaking blogosphere on the likely content of the deal and the message this agreement sends to the world.

By: Jan Mazza Topic: Global Economics & Governance Date: March 4, 2019
Read article More on this topic More by this author

Opinion

China's strategy: Growth, alliances, and tech acquisition

Despite the pause in the US-China trade war, the US and China are strategic competitors, and will continue to be so for the foreseeable future. China realizes that there is little room to settle long-term disputes and, as a result has shifted towards a strategy that focuses on sustaining growth at any cost, expanding alliances, and advancing its technology.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: February 27, 2019
Read article More on this topic More by this author

Blog Post

Reforming decision-making for EU taxation policy

Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, spoke at a Bruegel event on February 21, 2019.

By: Pierre Moscovici Topic: European Macroeconomics & Governance Date: February 21, 2019
Read about event More on this topic

Past Event

Past Event

Reforming decision-making for EU taxation policy

How should the EU taxation policy be reformed?

Speakers: Johannes Becker, Pierre Moscovici, Paola Profeta and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 21, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Balancing free trade with national security interests

In this episode of Director's Cut, Stephanie Segal of CSIS joins Bruegel's Guntram Wolff and Maria Demertzis for a conversation about the tension between free trade and national security issues, and the emerging threats to multilateralism.

By: The Sound of Economics Topic: Global Economics & Governance Date: February 19, 2019
Read article

Opinion

What can the EU do to keep its firms globally relevant?

There is a fear that EU companies will find it increasingly difficult to be on top of global value chains. Many argue that EU-based firms simply lack the critical scale to compete and, in order to address this problem, that Europe’s merger control should become less strict. But the real question is where the EU can strengthen itself beyond the realm of competition policy.

By: Georgios Petropoulos and Guntram B. Wolff Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: February 15, 2019
Read about event

Past Event

Past Event

Is the European automotive industry ready for the global electric vehicle revolution?

How can Europe catch up on the global electric vehicle race?

Speakers: Eric Feunteun, Jacques Pieraerts, Julia Poliscanova, Simone Tagliapietra and Reinhilde Veugelers Topic: Energy & Climate, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 12, 2019
Load more posts