BEIJING, Sept 19 (Askume) – Chinese policymakers may take steps to help the economy meet increasingly tough growth targets for 2024, including boosting demand to combat ongoing deflationary pressures, analysts and policy advisers said.
Official data showed the world’s second-largest economy broadened into a slowdown in August, raising expectations for more stimulus. President Xi Jinping recently urged officials to work toward meeting the country’s annual economic targets, signaling Beijing’s commitment to its roughly 5 percent GDP growth goal.
Policymakers face a complex economic situation, and China’s reliance on infrastructure spending to drive growth is raising credit risks. Excessive domestic investment amid weak demand is also adding to deflationary pressures, driving down prices and forcing companies to cut pay or lay off workers to cut costs.
“We need to strengthen fiscal policy, which will be more effective in tackling deflation, while keeping monetary policy more accommodative and liberal,” said a policy adviser, speaking on condition of anonymity.
The Federal Reserve’s interest rate cut on Wednesday kickstarted the easing cycle in the United States, which will create more room for the People’s Bank of China to lower interest rates and bank deposit reserve ratios. Analysts said the People’s Bank of China may also lower existing mortgage rates to help homeowners.
China may further increase spending. Local governments stepped up bond issuance to support major project construction, and the central government stepped up bond issuance to support key strategic sectors.
Policymakers may rely on a combination of fiscal stimulus and monetary easing to boost growth, but a key meeting of the ruling Communist Party in July reaffirmed a greater focus on the supply side. This suggests that concrete action is unlikely in the near term to address weak consumer demand and rising risks of deflation.
“They (policymakers) will increase their efforts because they are unwilling to accept low growth,” said Xu Hongcai, deputy director of the economic policy committee of the China Policy Science Association.
“But any kind of coercive incentive seems unlikely.”
China has relied on increased spending on infrastructure and manufacturing to support growth in recent years, and the central bank has been steadily lowering borrowing costs.
development goals at risk
China’s growth target for 2024 is around 5%, with some degree of flexibility. However, a deceleration in growth in recent months has prompted several global brokerages to lower their forecasts from that target.
China rarely misses its growth targets. The last time it missed its 2022 growth target was when the pandemic caused economic growth to fall to 3% in 2022, well below the target of about 5.5%.
“More stimulus measures are urgently needed,” said Jing Zhaopeng, senior China strategist at ANZ Bank. “Policy thinking seems to be shifting from supply to demand. Domestic demand and public consumption will receive a significant boost.”
Analysts at Morgan Stanley expect China to use fiscal expansion to increase social security spending on health, education and public housing, which will help facilitate precautionary savings and stimulate consumption.
ANZ plans to launch a stimulus package – including the benefits of expected mortgage rate cuts and efforts to boost trade in housing and consumer goods – that could generate 0.2% of GDP. However, the forecast for 4.9% growth by 2024 still stands.
Earlier this month, former central bank governor Yi Gang issued unusually strong comments urging action to tackle deflationary pressures.
China’s GDP deflator, the broadest measure of prices for a variety of goods and services, has fallen for five consecutive quarters, its longest deflationary trend since 1999.
The market widely expects the measure to have a negative impact in the sixth quarter from July to September, pushing producer prices further down and slowing consumer prices.
With employment and incomes volatile, it remains questionable whether consumption will improve significantly.
“Much more needs to be done to lift the economy out of the deflationary spiral, particularly on the fiscal front to ease pressure on local governments,” analysts at Societe Generale said in a note.
