China brings out its economic stimulus toolkit
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After a tumultuous start to the New Year, Chinese markets have been relatively calm in recent weeks. This should have been reassuring to the country’s leadership as it meant it could avoid uncomfortable distractions when it hosted the Group of 20 meeting
The improved performance of the Chinese equity markets reflects a more buoyant mood, which has also boosted other global markets. It also reflects efforts being made by fiscal and monetary policy-makers in China to boost confidence. China’s central bank flooded the country’s financial system with cash ahead of the Lunar New Year and has also been conducting open-market operations more frequently to ensure it can respond quickly to any liquidity squeeze.
China is entering unchartered waters as it liberalises its financial sector and becomes integrated into the global marketplace. This means China no longer has absolute control of its exchange rate, monetary policy and cross-border movement of funds and so is more vulnerable to external influences and attacks. This was well illustrated earlier this year, especially in January, when hedge funds bet against China’s currency falling and there was large-scale capital flight.
In recognition of such problems, at the G-20 meeting China’s central bank governor Zhou Xiaochuan said that policymakers need to strike a balance between growth, restructuring and managing risks to the economy – a hint that more stimulus would be on the way.
Meanwhile, at the opening of the national legislature last week, Premier Li Keqiang pledged that the economy will grow by 6.5 per cent this year, saying the government will use infrastructure spending, tax cuts, monetary policy and a larger budget deficit to ensure it achieves this target. It seems that the government is bringing out more tools from its economic toolkit – as Premiere Li promised it would if the economy continued to turn down.
It seems that the time is ripe to bring out the kit. February trade figures released last week showed that exports had fallen by 25.4 per cent year on year in dollar terms and 20.6 per cent in yuan terms, the worst monthly performance since the 2009 financial crisis. Manufacturing production figures have also shown a falling trend.
While the recently released five-year plan indicates that the government’s structural economic programme is still in place, in the short-term the Chinese authorities appear to have decided to take a pragmatic approach and use more economic stimulus as well as monetary easing.
As to whether this will be enough to reach the 6.5 per cent growth target, we will have to wait and see.
