China moves to fiscal stimulus

The PRC authorities began to implement a number of fiscal stimulus measures in the second half of 2023, as evidenced by the report of Zheng Shanjie, chairman of the State Committee for Development and Reform, at the fifth session of the Standing Committee of the National People’s Congress of China (NPC PC, quasi-parliament) of the 14th convocation.

According to excerpts from his speech, cited by the Xinhua news agency, Zheng assured that the tasks set by the NPC for the government are basically being met, and the economic growth rate is one of the best among the largest economies in the world. At the same time, he acknowledged that the current growth is achieved mainly due to the recovery momentum, and not sustainable factors. In the second half of the year, the PRC authorities will take action to increase domestic demand and promote the growth of household incomes. The PRC government promises to make “better use of the stimulus role of public investment” and “accelerate the issuance and use of special local government bonds.”

In his speech, Zheng touched on other issues in the economy, saying that the foundation for a sustainable recovery is not solid, and the external environment “is becoming more complex and full of uncertainties.” Domestic demand continues to be lower than desired, some businesses are struggling to operate, and “hidden dangers” have accumulated in a number of key areas. Among other tasks, which the head of the economic planning body in the PRC spoke about, is the promotion of youth employment, the expansion of the middle class and social support for the population.

On August 28, Minister of Finance Liu Kun spoke before the PC of the NPC. He called the execution of the 2023 budget stable, but he also acknowledged some problems. According to the minister, in the next phase, the PRC government will increase “the intensity of macro-political regulation” and focus on the goal of boosting domestic demand and boosting investor confidence. In addition, efforts will be made to improve the effectiveness of an active fiscal policy. The State Council wants to effectively use the mechanism of direct access to budget funds and accelerate the spending of budget funds. New special bonds of the regions in 2023 will be mainly issued before the end of September, and the proceeds will be spent before the end of October. All the above theses only develop the course that was approved at the meeting of the Politburo of the Central Committee of the Communist Party of China (there are 24 people) on July 24, where key topics on economic policy for the second half of 2023 were discussed. Next time, CPC leaders can talk about new measures to support the economy at the August meeting of the Politburo and at the plenary meeting of the Central Committee (205 people) dedicated once every five years to this topic.

The current state of the Chinese economy does not give much cause for optimism. In the first half of the year, China’s GDP grew by 5.5% (the official annual target is 5%). In the second quarter of 2023, the Chinese economy grew by 6.3% in annual terms (in the first – by 4.5%), but only by 0.8% compared to the previous quarter. Growth rates are slowing down: in the 1st quarter of 2023, the growth compared to the 4th quarter of 2022 was 2.2%. Foreign direct investment flows to China in April-June 2023 amounted to $4.9 billion, which was the lowest figure in the history of observations since 1998.

Earlier in 2023, the Chinese government had already taken a number of non-financial measures. On July 31, the State Committee for Development and Reform Affairs issued a document that approved the directions for stimulating domestic demand. In particular, it spoke about the removal of certain restrictions, the expansion of paid holidays, the confirmation of benefits for buyers of electric vehicles, etc. In addition, as Vedomosti wrote on August 21, the Chinese authorities began to take measures to protect the national currency from the flight of Western investors. The yuan began to weaken after the release of statistics on the outflow of foreign capital, reduced investment and insufficient growth in production, after which the People’s Bank of China raised the fixed dollar/yuan base rate from 7.1768 to 7.1986. On August 27, the China Securities Regulatory Authority reduced the stamp duty on stock trading from 0.1% to 0.05%, the first time since 2008.

The priority of the Chinese authorities is to expand the consumer base, which will make it possible to compensate for the drop in exports and create conditions for stable economic development, says Andrei Kochetkov, a leading analyst at Otkritie investitatsii. According to the expert, the current measures are aimed primarily at low-income segments of the population in order to increase demand. According to the analyst, it is too early to judge the effectiveness of these measures, but “some positive signals” can already be tracked, for example, the leveling off of the dynamics of falling profits of enterprises. Kochetkov noted that a continued slowdown in economic growth could prevent China from becoming the first economy in the world, and therefore Beijing needs precisely outpacing development rates.

The actions of the Chinese authorities are cyclical, says Sergey Lukonin, head of the economic and political sector of China at IMEMO RAS. According to the expert, the transition to a proactive fiscal policy can be seen quite often in China during periods of economic difficulties. At the same time, the scale of injections may vary depending on the criticality of the situation. He added that the measures taken can only partially revive demand, but due to the vast range of goods produced in China, it will be very difficult to increase the share of household final consumption in GDP to levels inherent in developed capitalist countries. “But the current state of the Chinese economy is not catastrophic. A slowdown is a natural process for any large economy,” the expert concluded.