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China’s leaders have vowed to step up fiscal support for the world’s second-largest economy, energizing markets on expectations of further intervention just days after the People’s Bank of China unveiled its biggest monetary stimulus package since the pandemic.
President Xi Jinping’s Politburo pledged on Thursday to “issue and utilize” government bonds to more effectively “serve as a catalyst for government investment,” as analysts warn China risks missing its official economic growth target this year.
State media reports of the meeting did not give figures for the proposed fiscal stimulus or whether it would exceed existing plans for long-term issuance by central and local governments this year.
“The intensity of cyclical adjustment in fiscal and monetary policies should be strengthened,” the state-run Xinhua News Agency quoted the official as saying.
China’s CSI 300 stock index rose more than 4 percent on Thursday, erasing all of its losses this year, while the Hang Seng Mainland Property Index, which tracks Chinese property developers listed in Hong Kong, rose more than 14 percent.
“It’s good to have this fiscal easing,” said Winnie Wu, China equity strategist at Bank of America. “The government needs to leverage to get the economy expanding, to drive activity and create demand. But we need to see the numbers. If this isn’t enough, which I expect, we’ll see more follow-up measures in the coming months.”
European markets opened higher, with the region’s broad Stoxx 600 index up 1%. Frankfurt’s Dax rose 1.1% and Paris’ CAC 40 added 1.3%. Both markets’ auto and luxury goods sectors, respectively, are heavily exposed to China.
The Politburo’s statement follows steps this week by the central bank and financial regulators, including cutting interest rates and providing billions of dollars in funding to support the stock market and encourage share buybacks.
The measures, which also included steps to support China’s crisis-hit property market, boosted China’s struggling stock market as investors pinned their hopes on greater government support for stocks.
But the government has stopped short of announcing the same fiscal “bazooka” as in past crises, when it pumped 4 trillion yuan ($570 billion) into the economy in 2008, sparking a boom that rippled through the global economy.
The government had already planned to issue about 5 trillion yuan of long-term treasury and special purpose local government bonds this year, most of which would be earmarked for investment in infrastructure and other projects.
Economists estimate that given China’s gross domestic product is up significantly since 2008, it would need to spend up to 10 trillion yuan over two years to fully reinflate the economy, money that would likely go to households rather than large-scale infrastructure or industrial projects.
They warn that despite rising investment in manufacturing, sluggish property prices are squeezing domestic consumption and putting China at risk of falling into a full-blown deflationary spiral.
“A proper reflation (for the Chinese economy) would require either a significant currency depreciation or very aggressive fiscal stimulus,” said Homin Li, senior macro strategist at Lombard Odier.
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The Politburo meeting said the government should “promote halting the decline and stabilizing the real estate market” and pledged to step up support for property developers and owners.
It also listed priority areas such as the need for policies to boost consumption, increase wages for the middle class and low-income earners, and encourage foreign investment in manufacturing.
They said policymakers need to ensure jobs for “critical groups” such as college graduates, migrant workers moving from rural to urban areas and “people escaping poverty.”
Additional reporting by Rafe Uddin in London
