China: Marginal Stimulus Plans

Published on July 30, 2019

China’s Politburo released a bland and rather uninformative statement last night pledging pro-active fiscal policy for the second half of 2019, and monetary policy that will be not too tight, and not too loose.

Those comments in fact followed two separate meetings of the Central Financial and Economic Affairs Commission (CFEAC) where both monetary and fiscal policy plans for the second half of 2019 were discussed in some greater detail. 

*** Of the two, the bulk of the stimulus that is currently planned will come on the fiscal side, including a steady pace of some 2.3 trillion yuan planned for the full year in tax or fee cuts, while monetary policy will be aimed largely at providing a stable backdrop for the economy, and maintaining “reasonable” liquidity for the financial sector. The People’s Bank of China is not expected to match the Federal Reserve’s 25 basis point rate cut that is widely expected tomorrow. ***

*** And in a separate, and perhaps more politically controversial decision, the Politburo also decided to give stronger financial support to President Xi’s “Made in China 2025” strategy and allocated 60 billion yuan out of the secretive “Premier Fund” to support ten hi-tech companies in the second half of 2019. That would be up from the 50 billion that, we understand, was allocated to that tech sector in the first half of the year. ***

Some additional color:

Monetary Policy

On Thursday, July 18, President Xi Jinping presided over the second of eight summer meetings of the CFEAC in Zhongnanhai, Beijing, to set monetary policy guidelines for the second half of 2019.

** In the near term, while the Federal Reserve’s expected 25 basis points rate cut tomorrow may push the RMB a bit higher, and in the process dent Chinese exports, the People’s Bank of China will not follow the Fed with a rate cut of its own.

** While the world is facing decelerating growth and trade protectionism, China, it was noted, is facing a combination of cyclical, institutional, and structural problems. Under those circumstances, the priority of monetary policy should be stability – a stable financial sector, employment, foreign trade, foreign investment, direct investment, and expectations environment.

** In other words, boring and predictable monetary policy for China is good. While the CFEAC endorsed the PBoC to cut the Reserve Requirement Ratio or even interest rates if really needed, the game plan will continue to be to manage liquidity and direct cash as needed into the system through open market operations. 

** The meeting also stressed the importance of the PBoC managing liquidity risks and the contagion and expansion of risks in small and medium-sized financial institutions, while stressing the need to adopt “counter-cyclical adjustments in a timely and appropriate manner” to ensure “reasonable” and ample liquidity. There appears to be at least one central bank worried about potential financial excesses and bubbles.

** In a side decision, but one that may be interesting to markets, the meeting also stressed that the PBoC and relevant government departments should develop financial technology in response to advances in big data and artificial intelligence. It specifically tasked the PBoC to accelerate the official launch of China’s own digital currency, known as the Digital Currency for Electronic Payments (DCEP), by 2020.

Fiscal Policy:

The following week, on Thursday, July 25, the CFEAC held the third of its eight summer meetings, this time to review the government budget and debt position from the first half and to set guidelines for the second half of 2019.

** The meeting endorsed a more proactive fiscal policy, including a further increase in government spending, along with additional cuts in taxes and non-tax “burdens” on businesses.

** Regarding the government’s current fiscal position, the Ministry of Finance reported that the growth rate of tax income in the first half of 2019 had slowed dramatically, only increasing by 1.4% from a year earlier, a full 13.9% lower than in H1 2018, due to tax and fee cuts already instituted to date.

** Looking ahead, the meeting approved fiscal expenditures of 12.145 trillion yuan for the second half of the year, or around 10% higher than the 11.033 yuan in expenditures over the same period last year. That will, however, represent a slight deceleration from H1 spending, which stood at 12.353 trillion yuan, although traditionally spending does tend to be front loaded into the first half of each year.

** As to the tax and fee cuts, the meeting approved cuts of 1.15 trillion yuan for the second half, roughly equal to the cuts in the first half of the year, which totaled 1.17 trillion. The total, 2.3 trillion, will be about 1 trillion more than last year’s 1.3 trillion yuan in cuts.

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