investment viewpoints

China Fiscal Stimulus – Careful Calibration

30 July 2020

Nivedita Sunil

Portfolio Manager

China’s current COVID-19 stimulus plan appears to have been designed to address long-term structural improvements in a calibrated way.

China has abandoned a GDP growth target this year for the first time since 1990. Instead, an approach is underway that will tackle unemployment in a targeted manner. This offers more flexibility to calibrate policy responses in the context of financial stability as well as in response to the evolving US-China dynamic.

In response to the COVID-19 crisis, China has announced a headline fiscal stimulus package equivalent to 8.4% of GDP. The goal is to provide subsidies and tax reliefs to small and medium enterprises (SMEs) and micro firms, create savings via the reduction of social security contributions, and fund a new infrastructure push.

This fiscal response is ‘softer’ than was the case in 2009, as a much larger proportion is focused on tax reliefs and providing subsidies as opposed to almost entirely going towards investment.

Since the details of the 2020 fiscal stimulus weren’t revealed until late May, most of the fiscal impulse will likely bear fruit in the second half of this year, adding a further fillip to the growth recovery out of China, in our view. So far, the off-budget fiscal financing has been frontloaded this year, and this will support a further infrastructure investment recovery in the second half of this year.

The government views its new infrastructure plan as being instrumental in accelerating China’s transition into a more domestically-oriented, consumption-driven economy. Over the next five years, we expect new infrastructure to unlock RMB15tn in investment to support this transition.

In the initial response to COVID-19, monetary policy took the lead. However, easing momentum has slowed since May. This lends credence to our view that policymakers are acutely aware of financial imbalances and are unlikely to turn the credit spigot with the same gusto as in 2009.

With a relatively strong growth rebound from the crisis, China’s current COVID-19 stimulus plan is not a big one-off bazooka, unlike in other developed markets. The authorities seems to be using this opportunity to address long-term structural improvements in a calibrated way so that they are better positioned for the future.

Our latest whitepaper explores the full extent of China’s fiscal and monetary stimulus measures which will likely define the economy’s trajectory over the next decade.

Click here to read the full document.

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