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China brings out its economic stimulus toolkit
By Suwatchai Songwanich, CEO Bangkok Bank (China)
After a tumultuous start to the New Year, Chinese markets have been relatively calm in recent weeks.
This should have been reassuring to the country’s leadership as it meant it could avoid uncomfortable
distractions when it hosted the G20 meeting in Shanghai in February and the National People’s
Congress in March.
The improved performance of the Chinese equity markets reflects a more buoyant mood which has
also boosted other global markets. It also reflects efforts being made by fiscal and monetary policymakers in China to boost confidence. China’s central bank flooded the country’s financial system with
cash ahead of the Lunar New Year and has also been conducting open-market operations more
frequently to ensure it can respond quickly to any liquidity squeeze.
China is entering unchartered waters as it liberalizes its financial sector and becomes integrated into
the global marketplace. This means China no longer has absolute control of its exchange rate,
monetary policy and cross-border movement of funds and so is more vulnerable to external influences
and attacks. This was well illustrated earlier this year, especially in January, when hedge funds bet
against China’s currency falling and there was large-scale capital flight.
In recognition of such problems, at the G20 meeting China’s central bank governor Zhou Xiaochuan
said that policy makers need to strike a balance between growth, restructuring and managing risks to
the economy – a hint that more stimulus would be on the way. Meanwhile, at the opening of the
national legislature last week, Premier Li Keqiang pledged that the economy will grow by 6.5 percent
this year, saying the government will use infrastructure spending, tax cuts, monetary policy and a
larger budget deficit to ensure it achieves this target. It seems that the government is bringing out
more tools from its economic toolkit – as Premiere Li promised it would if the economy continued to
turn down.
It seems that the time is ripe to bring out the kit. February trade figures released last week showed
that exports had fallen by 25.4 percent year-on-year in dollar terms and 20.6 percent in yuan terms,
the worst monthly performance since the 2009 financial crisis. Manufacturing production figures have
also shown a falling trend.
While the recently released five-year plan indicates that the government’s structural economic
program is still in place, in the short-term the Chinese authorities appear to have decided to take a
pragmatic approach and use more economic stimulus as well as monetary easing. As to whether this
will be enough to reach the 6.5 percent growth target, we will have to wait and see.
For more columns in this series please visit www.bangkokbank.com