China becomes first major economy to start withdrawing stimulus efforts amid pandemic


HONG KONG — As the first major economy to push back Covid-19, China is now leading the world in preparing to unwind its pandemic-induced economic recovery efforts.

Unlike the United States and Europe, which still flood their economies with cash and spending, China has started to restrict credit in some corners.

This shift puts China at the forefront of a challenge that other economies will face in the years to come as their economies recover: how to pull out stimulus without stifling growth or causing more instability. off the market.

Chinese policymakers have expressed concern over an overheating real estate market and wish to avoid larger imbalances. They are also eager to resume a multi-year campaign to reduce the debt that began to accumulate during the previous global recession.

If mismanaged, China’s tightening could hurt its recovery, crippling the global economy. China’s plans could also create bigger problems if they trigger more defaults or a bigger correction in Chinese stock markets, at a time when global investors are already nervous.

For these reasons, economists say, China is likely to move slowly, gradually tightening credit in parts of the economy while avoiding more brutal measures like raising interest rates.

“It is very clear that Chinese policymakers intend to loosen the stimulus and tighten policies,” Ding Shuang, chief economist for Greater China, told

Standard charter

Bank, “but they walked cautiously without suddenly turning around.”

China announced its intentions at annual parliamentary meetings held earlier this month. It set its target for gross domestic product growth in 2021 at “above 6%”, a relatively low rate given the dynamics of the economy and a sign that Beijing wants flexibility to withdraw stimulus measures in the future. months to come, economists said. The International Monetary Fund projects The Chinese economy will grow by around 8% this year.

China has lowered its budget deficit target – the gap between government spending and revenue – to 3.2% of GDP this year, from 3.6% in 2020. A lower deficit suggests a tighter fiscal policy. The government also reduced the quota for local government special bonds, a type of off-budget financing intended to finance local investments such as infrastructure, to around $ 560 billion, from $ 576 billion last year.

Beijing has not announced any additional issuance of special central government bonds this year, after selling around $ 154 billion of those bonds in 2020.

“As the economy resumes its growth, we will make appropriate policy adjustments, but in a moderate way,” Chinese Premier Li Keqiang said at a press conference on March 11. “Some temporary policies will be phased out, but we will introduce new structural policies. policies such as tax and fee cuts to offset the impact.

These measures followed previous steps and were interpreted by investors as a sign of a credit crunch. In January, the central bank recovered more liquidity than expected through daily open market operations, a tool used to control the money supply available to commercial banks. This briefly sent a short-term policy rate to its highest level in five years, making it more expensive for banks to borrow funds.

To contain rising house prices, Chinese financial regulators recently imposed new rules making it harder for developers, who are usually heavily indebted, to obtain new bank loans.

Broad credit growth recovered somewhat in February, after declining for four consecutive months. Still, analysts expect lending to slow again given recent signals from Beijing.

In contrast, last week the United States enacted a new $ 1.9 trillion economic aid package and the European Central Bank said he would increase his purchases of eurozone debt.

A sandstorm swept across northern China on Monday, wiping out skyscrapers and turning Beijing’s skies yellow. Jonathan Cheng of the WSJ explains what the country’s economic recovery has to do with it. Photo: Getty Images

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.

Beijing’s emergency measures last year included cutting taxes to help small businesses and ordering banks to grant more loans. Yet China’s tax measures were much less as a percentage of GDP than those of the United States and many developed economies.

At the end of 2020, China’s total fiscal spending on pandemic stimulus was around 6% of its GDP, compared to 19% for the United States, according to IMF calculations.

The Chinese economy had regained its pre-pandemic momentum in the last quarter of 2020, largely due to its success in containing Covid-19 and strong exports.


What is the best way for countries to withdraw stimulus without stifling growth or causing wider market instability? Join the conversation below.

Today, its leaders are more worried about debt control and other long-term economic issues, analysts say. Last year, China’s overall debt ratio, which measures the ratio of total debt to GDP, rose 24 percent, the fastest pace since 2009, to reach 270 percent, official data showed.

Many economists expect China’s central bank, the People’s Bank of China, to control the pace of new credit issuance rather than raising key interest rates, which would risk attracting inflows. speculative money likely to fuel dangerous asset bubbles. The central bank is committed to maintaining its prudent and flexible monetary policy, while avoiding flood-type stimulus measures.

“The market widely interprets PBOC’s tone as more hawkish” than before, said Mr. Ding of Standard Chartered. This could lead to risks, he said, if inadequate communication leads to overreacting from the market.

Another possible landmine is the possibility that a credit crunch will cause more defaults among state-owned enterprises. Many are heavily in debt and local governments, which have their own debt problems, are increasingly reluctant to bail them out.

“As China abandons support measures, some of the issues ignored last year may emerge this year,” said Wang Tao, Chinese economist at UBS. “We expect to see more defaults on corporate bonds and a higher bad loan ratio.”

Write to Stella Yifan Xie at [email protected]

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