China is becoming the first major economy to begin withdrawing efforts to stimulate the pandemic

HONG KONG – As the first major economy to defeat Covid-19, China is now taking the lead in its pandemic-led economic stimulus efforts.

Unlike the US and Europe, which are still flooding their economies with liquidity and spending, China has begun to shrink credit in some corners.

The change puts China at the forefront of a challenge that other economies will face in the coming years as their economies recover: how to withdraw the stimulus without reversing growth or causing wider market instability.

Chinese policymakers have expressed concern about an overheating of the housing market and want to prevent greater imbalances. They are also keen to resume a multi-year campaign to reduce the debt that began to build during the previous global recession.

If mishandled, China’s tightening could affect the recovery, which would hamper the global economy. China’s plans could also create bigger problems if they trigger more debt defaults or a larger correction in China’s stock markets, at a time when global investors are already nervous.

For these reasons, economists say, China is likely to move slowly, gradually squeezing credit into certain parts of the economy while avoiding stronger moves, such as rising interest rates.

“It is very clear that Chinese decision-makers intend to relax incentives and strengthen policies,” said Ding Shuang, chief economist for Greater China at Standard Chartered Bank, “but they followed closely without making a sudden return.”

China signaled its intentions at its annual parliamentary meetings earlier this month. It has set its target for raising gross domestic product in 2021 to “over 6%”, a relatively low rate, given the boost in the economy and a sign that Beijing wants flexibility to withdraw the stimulus in the coming months, economists said. The International Monetary Fund projects that China’s economy will expand by about 8% this year.

China has reduced its fiscal deficit target – the government spending and revenue gap – to 3.2% of GDP this year from 3.6% in 2020. A smaller deficit suggests a more restrictive fiscal policy. The government has also reduced the quota for special government bonds, a type of extra-budgetary financing for local investment financing, such as infrastructure, to about $ 560 billion, down from $ 576 billion last year.

Beijing has not announced further central government bond issuance this year, after selling about $ 154 billion of such bonds in 2020.

“As the economy picks up growth, we will make appropriate policy adjustments, but in a moderate way,” Chinese Premier Li Keqiang told a March 11 news conference. “Some temporary policies will be phased out, but we will introduce new structural policy structures such as tax cuts and fees to offset the impact.”

These moves followed the previous steps and were interpreted by investors as signaling a stricter credit. In January, the central bank eliminated more liquidity than expected from day-to-day open market operations, a tool used to control the supply of money available to commercial banks. This has briefly sent a key short-term monetary rate to its highest level in five years, making it more expensive for banks to borrow funds.

To tame rising real estate prices, China’s financial regulators have recently imposed new rules, making it more difficult for real estate developers, who are usually heavily leveraged, to obtain new bank loans.

The large increase in loans increased in February, after falling for four consecutive months. However, analysts expect lending to slow again, given recent signals from Beijing.

Instead, last week the US adopted a new $ 1.9 trillion economic aid package, and the European Central Bank said it would increase its eurozone debt purchases.

The different approaches reflect how Beijing views the pandemic as a temporary disruption, while Western policymakers are still trying to revive their economies and prevent long-term damage from the effects of the pandemic.

Last year’s Beijing emergency measures included cutting fees to help small businesses and ordering banks to lend more. However, China’s fiscal measures have amounted to a much lower share of GDP than those of the United States and many developed economies.

At the end of 2020, China’s total fiscal spending to stimulate the pandemic was about 6% of its GDP, compared to 19% for the US, according to IMF calculations.

China’s economy regained its pre-pandemic momentum in the last quarter of 2020, largely due to its success in Covid-19 content and strong exports.

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Now, its leaders are more concerned about debt control and other long-term economic problems, analysts say. Last year, China’s overall leverage ratio, which measures the ratio of total debt to GDP, rose 24% – the fastest pace since 2009 – to 270%, according to official data.

Many economists expect China’s central bank, the People’s Bank of China, to ease the pace of new credit issues, rather than raising key interest rates, which could attract speculative cash flows that could fuel dangerous asset bubbles. The central bank is committed to maintaining its prudent and flexible monetary policy, while avoiding flood-like stimuli.

“The market broadly interprets the tone of PBOC as more naughty than before,” said Mr Ding of Standard Chartered. This could lead to risks, he said, if inadequate communication leads to excessive market reactions.

Another possible landmine is the potential for tighter credit to provoke more implications among state-owned enterprises. Many are heavily in debt, and local governments, which have their own debt problems, are increasingly worried about saving them.

“As China abandons support measures, some of the issues discussed last year could arise this year,” said Wang Tao, a Chinese economist at UBS. “We expect to see more corporate bond defaults and a higher ratio of non-performing loans.”

Write to Stella Yifan Xie la [email protected]

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