China prepares string of measures to counter impact of US tariffs

People's Bank of China governor Yi Gang chatting with International Monetary Fund managing director Christine Lagarde in Beijing last month. He has spent the past year saying that he wants to avoid a flood of stimulus, pushing back against expectatio
People's Bank of China governor Yi Gang chatting with International Monetary Fund managing director Christine Lagarde in Beijing last month. He has spent the past year saying that he wants to avoid a flood of stimulus, pushing back against expectations of benchmark interest-rate cuts.PHOTO: REUTERS

BEIJING • US President Donald Trump's call for the Federal Reserve to mirror its Chinese counterpart misses the mark because Beijing's main defence against the fallout from the trade war will come from the Finance Ministry, and not its central bank.

If tariffs begin to really hurt China's growth this year, there is plenty of direct fiscal firepower left to stoke the economy before the People's Bank of China would have to cut interest rates. Data released on Wednesday showed an across-the-board slowdown last month.

The central and local authorities in China have at least 25.1 trillion yuan (S$5 trillion) unspent in their budgets this year, according to data compiled by Bloomberg using official budget plans. That is 2 trillion yuan more than the ammunition China had in the same period last year - and about equivalent to the entire annual output of Germany.

"Chinese leaders will be able to better utilise different kinds of policy tools than their US counterparts if the trade war persists, and that is where China's confidence comes from," said Ms Serena Zhou, an economist at Mizuho Securities Asia in Hong Kong.

"From monetary policy and fiscal policy to the dominant role of the state-owned enterprises, China's control on the economy is obviously stronger than the US," she said.

Indeed, China's central bank governor Yi Gang has spent the past year saying that he wants to avoid a flood of stimulus, pushing back against expectations of benchmark interest-rate cuts as he seeks to curb market bubbles and keep a lid on debt growth. That said, economists from Morgan Stanley to China International Capital Corporation (CICC) and Macquarie Securities expect further cuts to the proportion of deposits banks are forced to lock away as the authorities look to keep the credit taps flowing.

The authorities have ramped up fiscal expenditure earlier this year than they usually do, with the most obvious front-loading coming in infrastructure-related areas such as transportation and environmental protection.

The central and local authorities in China have at least 25.1 trillion yuan (S$5 trillion) unspent in their budgets this year, according to data compiled by Bloomberg using official budget plans. That is 2 trillion yuan more than the ammunition China had in the same period last year - and about equivalent to the entire annual output of Germany.

Even so, more than two-thirds of the total augmented budget - the general public budget, the government fund budget and special government bonds together - remains unused.

Of course, merely increasing this year's spending is not the limit of fiscal action if the trade war blows up and impacts China's economic growth significantly.

Officials can support growth by selling more debt via local government financing vehicles and policy banks, though that begins to run counter to the goal of cleaning up debt.

"China may step up its pro-growth policies if the US imposes additional tariffs on US$300 billion (S$411 billion) worth of Chinese goods", and the preferable policy options include expansionary fiscal policy such as tax and fee cuts, according to CICC economists.

A severe growth slowdown is likely to produce a "whatever it takes" moment for China's policymakers. Otherwise, the Communist Party faces failure to meet its long-term growth target, just in time for its centenary in 2021.

 
 
 

For its part, China's central bank has also appeared to be leaning towards an easing bias since this month as trade tensions escalate.

Compared to the room for more fiscal stimulus, the central bank has less space to manoeuvre and will likely stick to the "targeted approach" for now.

Universal cuts to reserve-requirement ratios and interest rates are, however, on the table if the economy faces greater challenges, said chief analyst of banking Wang Yifeng of Everbright Securities in Beijing.

The central bank has appeared to be more accommodative in open market operations since early this month, adding liquidity to stabilise market sentiment.

Monetary policy officials have also sought to ease investors' concerns by saying that it has ample policy room and tools to deal with any uncertainties.

Morgan Stanley economist Robin Xing said that "we can't quantify the impact of the trade war on corporate sentiment, so the real influence may be larger" than what economist estimates suggest, which reinforces the case for more pro-growth policies.

 
A version of this article appeared in the print edition of The Straits Times on May 17, 2019, with the headline 'China prepares string of measures to counter impact of US tariffs'. Print Edition | Subscribe