(Bloomberg) -- China’s top leaders signaled they are planning to increase stimulus this year through fiscal and monetary policy as the coronavirus outbreak hammers the world’s second-biggest economy.
At a Friday meeting chaired by President Xi Jinping, officials pledged to be more “proactive” in using fiscal policy and exercise “more flexibility” in monetary easing. The wording indicates a greater easing bias compared with the stance that was endorsed at a top-level economic meeting in December, where the Communist Party leadership laid out stimulus plans for 2020.
In a separate statement from the central bank over the weekend, Deputy Governor Liu Guoqiang said the People’s Bank of China will free up part of the reserves of some commercial lenders to unleash long-term funding to the economy, and consider adjusting the benchmark deposit rate at an appropriate time.
The coronavirus has forced officials to keep millions of people at home and away from work, impacting businesses -- both big and small -- which have suspended or limited operations. The epidemic is weighing on an economy that was already growing at its slowest in three decades, with ratings company S&P Global warning that a prolonged public health crisis could cause the bad loans ratio in China’s banking system to more than triple.
“We expect policy loosening to be broad based with the main difference from previous loosening cycles likely to be in the property area,” Song Yu, chief China economist at Beijing Gao Hua Securities Co., Goldman Sachs Group Inc (NYSE:GS).’s mainland joint-venture partner, wrote in a note.
“It appears increasingly likely that the budget deficit will be adjusted, though any adjustment will likely be small, no more than 3.5% as an upper limit,” he said. “But the broader augmented fiscal deficit, which incorporates items such as proceeds from special bond issues, will surely be significantly larger.”
A separate teleconference meeting took place on Friday, with more than 170,000 Communist Party cadres and government officials, all the way down to the county level, the biggest ever of its kind, according to state-run news agency Xinhua. Xi told attendees that the outbreak is the “most rapid, widespread and difficult to contain” public health crisis China has faced since the founding of the People’s Republic in 1949.
Reserve Ratio Discounts
The PBOC will soon conduct a financial inclusion review on commercial banks and offer qualified lenders discounts on their reserve ratios, Deputy Governor Liu said on the central bank’s WeChat account on Saturday. Authorities will keep liquidity sufficient and continue to use targeted re-lending and re-discounting funding to help small firms, he said.
Liu also repeated an earlier pledge that the central bank will consider economic and inflation pressures when adjusting the benchmark deposit rate at an appropriate time. China slashed a range of policy rates this month.
Read more: China Benchmark Loan Rate Drops After PBOC Eases Policy (1)
Members of the party’s Politburo on Friday also pledged accelerate construction projects and step up efforts to support industries that are involved in making vaccines, bio-medicines and medical equipment, as well as 5G and industrial networks. Officials also urged local governments to shift toward restoring business operations and “actively” helping migrants return to work.
“The Politburo employed a more supportive tone in its official release, with stronger and more explicit wording,” Bloomberg economists Qian Wan and David Qu wrote on Saturday. “This reinforces our view that more stimulus is underway to offset the blow to economic activity from the coronavirus.”
CHINA REACT: Politburo Shift to Pro Growth From Virus Defense
(Updates with analyst comments from fifth paragraph.)
