China’s politburo pledges fiscal support for economy

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China’s leaders have vowed to intensify fiscal support for the world’s second-largest economy, in a statement of support just days after the central bank announced the biggest monetary stimulus since the pandemic.

The politburo, led by President Xi Jinping, pledged on Thursday to “issue and use” government bonds to better implement “the driving role of government investment”, in comments that come as analysts warn that China is in danger of missing its official economic growth target this year.

State media reports of the meeting did not provide figures for the proposed fiscal stimulus, or whether it would exceed existing plans for long-term central government and local government issuance this year.

“We should increase the intensity of countercyclical adjustment of fiscal and monetary policies,” state news agency Xinhua cited officials as saying.

China’s CSI 300 stock benchmark was up more than 4 per cent on Thursday, fully erasing its losses for the year. The Hang Seng Mainland Properties index, which tracks Chinese developers listed in Hong Kong, rose more than 14 per cent.

“It is good to do this fiscal easing,” said Winnie Wu, China equity strategist at Bank of America. “For the economy to expand and boost activity, create demand, the government will have to lever up. But we need to see the numbers . . . if this is not enough [I expect] there will be more follow-up in the coming months.”

The politburo’s statement follows measures this week from the central bank and financial regulators including interest rate cuts and billions of dollars of funds to prop up the stock market and encourage share buybacks.

The moves, which also comprised steps to support China’s crisis-hit property market, sent the country’s moribund stock market higher as investors bet on increased state support for equities.

But the government has stopped short of announcing a fiscal “bazooka” as it has during past crises, such as when it unleashed Rmb4tn ($570bn) in 2008, sparking a boom that reverberated through the global economy.

The government was already planning to issue about Rmb5tn in long-term government bonds and special-purpose local government bonds this year, but most of this was earmarked for investment in infrastructure or other projects.

Economists estimate that given the much larger size of China’s gross domestic product compared with 2008, it would need to spend up to Rmb10tn over two years to fully reflate the economy, with this money going to households rather than big-ticket infrastructure or industrial projects.

They warn that China is in danger of slipping into a full-fledged deflationary spiral as the property slump weighs on domestic consumption even as investment in manufacturing rises.

“A proper reflation [of the Chinese economy] involves either of these two things: a much weaker currency or very aggressive fiscal stimulus,” said Homin Lee, senior macro strategist at Lombard Odier.

The politburo meeting promised to provide more support for property developers and owners, saying the government should “promote the real estate market to stop falling and stabilise”.

It also listed priority areas such as the need for policies to promote consumption, increase middle-class and low-income salaries, and encourage foreign investment in manufacturing.

They said policymakers needed to ensure employment for “key groups” such as college graduates, migrant workers who move from rural to urban areas and “people who have escaped poverty”.