Analysis – China piles on policy measures to revive economy but no 'bazooka' in sight Reuters

Written by Kevin Yao

BEIJING (Reuters) – Chinese policymakers will add measures to at least help the economy meet its increasingly challenging growth rate in 2024, analysts and policy advisers said, with a focus on boosting demand to combat persistent inflationary pressures.

Official data showed the world's second-largest economy contracted in August, fueling expectations of more stimulus. President Xi Jinping recently urged the authorities to strive to meet the country's annual economic goals, indicating that Beijing remains committed to its 5% GDP growth target.

Policymakers navigate a complex economic environment, where China relies on infrastructure spending to fuel growth that increases credit risk. Excessive domestic investment amid weak demand has also fueled inflationary pressures, which have already driven down prices and forced companies to cut wages or lay off workers to cut costs.

“We need to strengthen monetary policy, which is more effective in dealing with inflation, while adjusting the monetary policy to keep it reasonable,” the policy adviser said on condition of anonymity.

The Federal Reserve's interest rate cut on Wednesday, which started the US tightening cycle, will create more room for the People's Bank of China (PBOC) to lower interest rates and the amount of banks' reserve requirements. The PBOC may also lower interest rates on existing mortgages to help homeowners, analysts said.

China can also increase its consumption. Local governments have been accelerating bond issuance to help fund the construction of major projects, as well as increased central government debt issuance to support key strategic sectors.

While policymakers may rely on a combination of fiscal stimulus and monetary easing to spur growth, a key meeting of the ruling Communist Party in July confirmed a strong focus on the supply side. That suggests that stronger measures to address weak consumer demand and deepening inflation risks are unlikely in the near term.

“They (policymakers) will step up efforts as they are not willing to accept low growth,” said Xu Hongcai, deputy director of the economic policy commission at the government-backed China Association of Policy Science.

“But any strong incentive seems unlikely.”

In recent years China has relied on increased infrastructure and manufacturing spending to support growth, as the central bank has steadily lowered borrowing costs.

DIRECT GROWTH IN DANGER

China's growth target of around 5% for 2024 allows for some flexibility. However, sluggish growth in recent months has prompted many global marketers to lower their forecasts below that target.

China, which has never failed to meet its growth target, last missed its 2022 growth target, when the pandemic pushed growth to 3% in 2022, much lower than the target of 5.5%.

“More momentum is needed,” said Xing Zhaopeng, ANZ's China strategist. “Policy thinking seems to be changing from buying to demand. There will be a big boost in housing demand and public spending.”

Morgan Stanley analysts predict that China will use fiscal expansion to increase spending on social security, such as health care, education, and public housing, which will help reduce conservative savings and increase consumption.

ANZ has penciled in a stimulus package – which includes the benefits of a mortgage rate cut and efforts to stimulate the housing and consumer goods trade – that could generate 0.2% of GDP. But it still maintains its 2024 growth forecast of 4.9%.

Earlier this month, the former central bank governor, Yi Gang, made unusually strong comments calling for action to combat inflationary pressures.

China's GDP deflator, the broadest measure of prices in goods and services, has fallen for five consecutive quarters – the longest decline in inflation since 1999.

This ratio is expected to remain negative in the sixth quarter of July-September, with producer prices falling and consumer prices remaining weak.

Any sharp regrowth in consumption remains in doubt, amid job and income insecurity.

“In order to boost the economy from the fall in inflation, more is needed, especially on the fiscal side to ease the pressure on local governments,” Societe Generale (OTC:) analysts said in a note.