BEIJING, Aug.3 (Reuters) – China set to step up spending on infrastructure projects as central bank backs modest easing measures as Delta variant and flood risks threaten to slow its recovery, insiders and analysts said.
Chinese leaders are looking to prevent a more pronounced second-half growth slowdown that could lead to layoffs, but they have little appetite for stepping up stimulus measures that could undermine long-term efforts to tackle downside risks. debt, they said.
China’s economy has returned to pre-pandemic growth levels thanks to surprisingly strong exports, but the expansion is running out of steam, with slowing consumption and investment.
Last week, a meeting of the Politburo, a supreme decision-making body of the ruling Communist Party, pledged to maintain an accommodating stance in the face of a patchy domestic recovery and global uncertainty.
“The downward pressure on the economy is increasing but we have enough political tools to deal with it,” said a political source advising the government. “Fiscal policy will be more effective in providing targeted support to the economy.”
The economy is set to grow by more than 8% this year, but analysts say pent-up demand for COVID has peaked and predict growth rates are starting to moderate.
Chinese manufacturers are grappling with higher commodity prices and global supply chain bottlenecks. Meanwhile, the global spread of the Delta variant and outbreaks of home cases, in addition to recent heavy rains and flooding in some Chinese provinces, have disrupted business activities.
Local governments have more room to speed up bond issuance to fund expensive projects, after a slow start this year as officials sought to control debt risks while approving projects under the 14th five-year plan (2021-2025), according to analysts.
Net issuance of local government special bonds reached 1.0 trillion yuan ($ 156.3 billion) in the first half, accounting for 28 percent of the annual quota, according to finance ministry data.
“We believe this implies that the issuance of special bonds from provincial governments should accelerate in the second half of the year to help stimulate investment. This fiscal policy cushion is likely to support growth in the second half,” said Li-Gang Liu, chief economist for China at Citigroup.
China’s infrastructure investment growth slowed to 7.8% in the first six months, from 11.8% in January-May.
But key leaders at the Politburo meeting hinted that some of the funds raised through the bond issuance might not be used until late 2021 or early next year, when a major reshuffle of the direction will take place.
MODEST POLICY FLEXIBILITY
The People’s Bank of China will likely play a supporting role in the second half of the year, insiders and political analysts have said. He may offer another RRR cut this year to increase liquidity, which will help local governments sell bonds.
As of July 15, the reduction in the reserve requirement ratio (RRR) of banks will free up about 1 trillion yuan in long-term liquidity to support growth.
But the PBOC may need to be cautious in cutting interest rates at a time when the Federal Reserve considers gradually reducing stimulus measures, which could increase capital outflows from China and increase pressure on the yuan, analysts said.
“If the Fed tightens its policy, we will not loosen its policy aggressively as this could fuel capital outflows and put pressure on the exchange rate,” said Zong Liang, chief researcher at the Bank of China .
The PBOC had scaled back COVID-induced stimulus measures to reduce debt risks while maintaining targeted support for small businesses. Growth in total social finance, a broad measure of liquidity and credit, slowed to 11% in June, from an almost three-year high of 13.7% in October 2020.
($ 1 = 6.4633 Chinese yuan)
Editing by Jacqueline Wong
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