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

Blog Post

India in 2024: Narendra Modi once more, but to what end?

Even with the recent economic slowdown, India still boasts Asia’s fastest growing economy in 2018. But beneath the veneer of impressive GDP expansion, uneasiness about India’s economic model clearly tempers enthusiasm.

By: Alicia García-Herrero and Trinh Nguyen Topic: Global Economics & Governance Date: May 17, 2019
Read article More on this topic More by this author

Blog Post

What is in store for the EU’s trade relationship with the US ?

If faced with a resurgent President Trump after the next US election, the EU will have some difficult decisions to make as it is compelled to enter a one-sided negotiation. Failure to strike a deal will imperil the world’s largest trade relationship and contribute to the progressive unravelling of the rules enshrined in the World Trade Organization – although the changes required of Europe by Trump’s demands may ultimately turn out to be in the interest of Europeans.

By: Uri Dadush Topic: Global Economics & Governance Date: May 16, 2019
Read about event More on this topic

Past Event

Past Event

CANCELLED: Future of taxation in the EU

Due to a previously unannounced air traffic controllers strike in Belgium, the Prime Minister Morawiecki is unable to land in time for the event. We apologise for any inconvenience.

Speakers: Marie Lamensch, Mateusz Morawiecki and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 16, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Evolution of US-China relations amid trade-tariff conflict

Bruegel director Guntram Wolff and Bruegel fellow Uri Dadush welcome William Alan Reinsch, senior adviser and Scholl chair in international business at the Center for Strategic and International Studies, for a discussion of how China-US relations are developing in the context of unfolding trade war.

By: The Sound of Economics Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic More by this author

Blog Post

Implications of the escalating China-US trade dispute

If allowed to escalate, the trade dispute between China and the United States will significantly increase the likelihood of a global protectionist surge and a collapse in the rules-based international trading system. Here the author assesses the specific impacts on the Chinese and US economies, as well as the strategic problems this dispute poses for Europe.

By: Uri Dadush Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic

Opinion

Will China’s trade war with the US end like that of Japan in the 1980s?

The outcome of the US-China trade war is anticipated to be quite different from the experience of Japan in the 1980s and 1990s, due to China’s relatively lower dependence on the US and having learned from the Japanese experience.

By: Alicia García-Herrero and Kohei Iwahara Topic: Global Economics & Governance Date: May 13, 2019
Read article More on this topic More by this author

Opinion

Trade war: Is the U.S. panicking due to China's big hedge?

U.S.-China trade war has suddenly taken centre stage following Donald Trump’s unexpected announcement to ramp up tariffs if no deal is reached. U.S. is in desperate need for a comprehensive victory, and China is ready to make concessions, but not to the extent of transforming its state-led economic model into a market-based economy.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: May 9, 2019
Read article More by this author

Blog Post

Spitzenkandidaten visions for the future of Europe's economy

What are the different political visions for the future of Europe’s economy? Bruegel and the Financial Times organised a debate series with lead candidates from six political parties in the run-up to the 2019 European elections.

By: Giuseppe Porcaro Topic: European Macroeconomics & Governance, Global Economics & Governance, Innovation & Competition Policy Date: May 8, 2019
Read about event More on this topic

Past Event

Past Event

The emerging new geography of financial centers in Europe

What shape is the new financial continent of Europe?

Speakers: Rebecca Christie, Valerie Herzberg, Nicolas Véron and William Wright Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 29, 2019
Read article More on this topic

Opinion

Life after the multilateral trading system

Considering a world absent a multilateral trading system is not to promote such an outcome, but to encourage all to prepare for the worst and instil greater clarity in the mind of policymakers as to what happens if compromise fails.

By: Uri Dadush and Guntram B. Wolff Topic: Global Economics & Governance Date: April 25, 2019
Read article More on this topic More by this author

Opinion

What else China can do to support growth in the short term

Recent data shows the downward spiral in the Chinese economy has somewhat eased on a cyclical basis, but it is still too early to cheer for a full stabilization.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: April 23, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Resuming the EU-US trade talks

Maria Demertzis sits down with Bruegel senior fellow André Sapir to break down the news, discussing the events leading up to the renewed EU-US trade talks, and the likely future course.

By: The Sound of Economics Topic: Global Economics & Governance Date: April 23, 2019
Load more posts