MNI INTERVIEW: China To Boost Stimulus In U.S. Tariff Response

China is likely to further boost fiscal spending and relax restrictions on consumption to boost domestic demand as the U.S. hits the nation’s exports with 104% tariffs, a prominent economist and senior policy advisor told MNI, adding that another CNY1 trillion could potentially be added to plans for special Treasury bond issuance.

Authorities will continue to target economic growth of around 5%, despite what is likely to be a negative contribution from net exports, said Li Daokui, director of the Institute for Chinese Economic Practice and Thinking at Tsinghua University.

“Exports to the U.S. accounted for only 2.77% of China's GDP last year, and the country is capable of offsetting the tariff impact given its relatively large fiscal policy space,” he said in an interview, noting that central government debt of only about 25% of GDP leaves significant room for additional borrowing.

The government could if needed add another CNY1 trillion in special Treasury issuance on top of the CNY1.8 trillion announced in early March, he said. These bonds fall within the government-managed funds budget as opposed to the general public budget, so selling more of them would not affect the fiscal deficit target set earlier this year of around 4% of GDP, he noted.

Fiscal policy will play the lead role in China’s response to tariffs, as the People’s Bank of China will need to reserve policy ammunition given its focus on maintaining the stability of the currency and cross-border capital flows, Li said. (See MNI: PBOC Seen Gradually Weakening Yuan Fixing Amid Trade War)

SUPPORT FOR EXPORTING REGIONS

Targeted measures to support exporters and to avoid large-scale shutdowns and bankruptcy will also be crucial, Li said, adding that regions with greater dependency on exports may be allowed to issue more special bonds with central government guarantees.

Authorities should also establish a mechanism for coordinating the actions of state-owned investment companies to support capital markets, Li said, noting how major state-owned enterprises led by Central Huijin Investment had already moved to increase purchases of A-shares and ETFs this week.

“This is faster and more effective than launching a stock market stabilisation fund,” said Li.

But boosting stock holdings will be not enough on its own to stabilise markets should the tariff war continue, as investors will need proof of support for domestic demand, Li said, adding that additional measures could be signalled during the Politburo meeting in late April.

National fiscal moves could include the further expansion of a consumer goods trade-in scheme, with funding likely to increase to CNY500-600 billion from the current CNY300 billion from special treasuries, said Li. (See MNI: China Needs Services, Childcare Subsidy To Boost Spending)

Authorities should also relax restrictions such as a ban on motorcycles in more than 100 cities, which could prompt CNY1 trillion in additional consumer spending, he said. Standard pensions for the rural population including those who were once migrant workers should also be raised to CNY800 per month from CNY220, according to Li.

Beijing, Shanghai and Shenzhen should move faster to reduce areas subject to restrictions on home-buying, said Li, who expected an accelerated rollout of measures to support the real estate market in major cities. (See MNI: China To Boost Developer Financing Support Further)

“While the tariff war is unlikely to have a direct impact on the housing market, it could dampen buyers’ confidence,” he added.