MNI INTERVIEW: China Likely To Announce New Fiscal Stimulus

China is likely to introduce additional stimulus measures including new special treasury issuance by as early as the Politburo meeting at the end of this month to counter the downward economic pressure driven by the Iran war and meet the national growth target, a leading policy advisor told MNI, arguing that the central government has ample fiscal space.

Indicators reflecting domestic demand fell short of expectations last quarter, with a fall in fixed asset investment particularly concerning, said Zhang Ming, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. Without further stimulus this month, weak momentum may continue into the second half, with sluggish consumption and investment dragging on growth.

China should issue additional special treasury bonds to fund stimulus, Zhang said in an interview, adding that the People's Bank of China is also likely to cut its interest rate later this year. The government could also increase this year's quota for policy-based financial instruments, providing capital for local infrastructure projects, including those under construction, helping ease local fiscal pressures, he suggested. (See MNI INTERVIEW2: Chinese Economist Suggests QE To Boost Demand)

The fiscal plan made at the beginning of the year did not account for the effects of the U.S.-Iran conflict, which caused oil prices to rise significantly and dealt a negative shock to China's economy, he said.

At the same time, while China’s 2026 economic growth target is 4.5%–5%, officials still hope for an outcome at the higher end of the range, he noted, pointing to policymakers’ call for “ better results in actual work” when the objective was announced.

SPECIAL TREASURIES

The government has already authorised CNY1.3 trillion in ultra-long-term special treasury bonds to support investment and consumption, but the quota was mainly used up in the first half, according to the National Development and Reform Commission.

"Whether China's economy can be activated in the short term depends on fiscal policy,” Zhang said. Government-led infrastructure investment is essential, given the weakness in consumption and investment demand, he said. 

Interest rate cuts and reserve requirement ratio reductions are called for as well, with rate cuts helping lower mortgage rates and stimulate property markets in first- and second-tier cities, which would be critical for stabilising real estate prices around the country, according to Zhang. It would also have marginal positive effects for business operations, he said.

The pace of monetary easing should not be slowed because of a rise in inflation driven by oil prices at a time of weak demand, Zhang said, adding that without stimulus inflation is likely to fall back in H2. (See MNI INTERVIEW: China Property Bailout Would Take 10% Of GDP)