Moneycontrol PRO
UPCOMING EVENT:Watch leaders discuss the biggest issue of our times at the Sustainability 100+ Summit. Register now!

As headwinds rise, China seen quickening fiscal support to protect growth

China's manufacturers are grappling with higher raw material prices and global supply chain bottlenecks.

August 03, 2021 / 04:22 PM IST

China is poised to quicken spending on infrastructure projects while the central bank supports with modest easing steps, as risks from the Delta variant and floods threaten to slow its recovery, policy insiders and analysts said.

Chinese leaders are seeking to prevent a sharper growth slowdown in the second half that could lead to layoffs, but there is little appetite for them to ramp up stimulus that could undermine a long-term push to tackle debt risks, they said.

China's economy has rebounded to its pre-pandemic growth levels driven by surprisingly strong exports, but the expansion is losing steam, with softness in consumption and investment.

Last week, a meeting of the Politburo, a top-decision making body of the ruling Communist Party, pledged to maintain an accommodative stance in the face of an uneven domestic recovery and global uncertainty.

"The downward pressure on the economy is increasing but we have enough policy tools to deal with it," said a policy source who advises the government. "Fiscal policy will be more effective in providing targeted support for the economy."


COVID-19 Vaccine

Frequently Asked Questions

View more
How does a vaccine work?

A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

How many types of vaccines are there?

There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.

What does it take to develop a vaccine of this kind?

Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.

View more

The economy is on track to grow more than 8% this year but analysts say pent-up COVID demand has peaked and forecast that growth rates are starting to moderate.

China's manufacturers are grappling with higher raw material prices and global supply chain bottlenecks. Meanwhile, the global spread of the Delta variant and outbreaks of cases at home, on top of recent heavy rainfall and floods in some Chinese provinces have disrupted business activities.

Local governments have more space to quicken bond issuance to fund big-ticket 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), analysts said.

Net local government special bond issuance reached 1.01 trillion yuan ($156.3 billion) in the first half, accounting for 28% of the annual quota, finance ministry data showed.

"We think that this implies that the issuance of provincial government special bonds is bound to accelerate in the second half to help boost investment. This fiscal policy cushion is likely to support growth in H2," said Li-Gang Liu, chief China economist at Citigroup.

Growth of China's infrastructure investment slowed to 7.8% in the first six months from 11.8% in January-May.

But top leaders at the Politburo meeting hinted that some of the funds raised from bond issuance may only be used in late 2021 or early next year, when an important leadership reshuffle takes place.


The People's Bank of China will likely provide a supporting role in the second half, policy insiders and analysts said. There is scope for it to deliver another RRR cut this year to boost liquidity, which will help local governments sell bonds.

Effective July 15, the cut to banks' reserve requirement ratio (RRR) will release around 1 trillion yuan in long-term liquidity to underpin growth.

But the PBOC may have to tread cautiously in cutting interest rates at a time when the Federal Reserve is considering tapering stimulus, which could increase capital outflows from China and add pressure on the yuan, analysts say.

"If the Fed tightens policy, we won't loosen policy aggressively as that could fuel capital outflows and put pressure on the exchange rate," said Zong Liang, chief researcher at Bank of China.

The PBOC had been scaling back COVID-driven stimulus to curb debt risks while maintaining targeted support for small firms. Growth of total social financing, a broad measure of liquidity and credit, slowed to 11% in June from a near three-year high of 13.7% in October 2020.

first published: Aug 3, 2021 04:20 pm

stay updated

Get Daily News on your Browser
ISO 27001 - BSI Assurance Mark