China policymakers see renewed urgency for economic support

The fact that two major Chinese economic centres are reopening brings hope to investors of a recovery. (Image: Reuters)

Chinese policymakers signalled a renewed sense of urgency on Monday for steps to shore up the flagging economy, saying this quarter was a critical time for policy action as evidence points to a further loss of economic momentum.

Senior officials from China’s central bank and leading ministries warned at a news conference of risks for the economy, battered in recent months by COVID-19 related curbs, while promising fresh measures to follow a stimulus package released in May.

"Currently, China’s economic stabilisation and rebound are at a key window, and the third quarter is crucial for rolling out policy measures," Yang Yinkai, Deputy Secretary General of the National Development and Reform Commission, said at a news conference.

"The second half of the year is a critical period to make up for the losses in the second quarter due to COVID outbreaks."

China will accelerate infrastructure investment and attract social capital into key projects, Yang said, while aiming for the best possible results for economic growth.

Liu Guoqiang, Vice Governor of the People’s Bank of China, said at the same news conference that the central bank had relatively ample room for monetary policy, although it would avoid flood-like stimulus.

The central bank last month cut rates to shore up the economy, making it an outlier among major central banks that are mostly raising rates to battle inflation.

Liu said the central bank would also guide China’s policy banks and commercial banks to support infrastructure projects, which policymakers typically rely on to spur growth, as domestic demand wanes.

China’s economy narrowly avoided contracting in the second quarter amid widespread COVID-related lockdowns and a deepening property crisis, which have badly damaged consumer and business confidence.

Recent factory activity surveys and a rising number of COVID cases pointed to a further loss of momentum in the economy in August, pressuring the shaky recovery.

While booming exports remained a major driver of the world’s second-biggest economy this year, Assistant Commerce Minister Li Fei warned at Monday’s news briefing that China’s foreign trade faces unfavourable factors, including weakening external demand.

With the yuan weakening, Li said the commerce ministry will help foreign trade firms hedge exchange rate risks.

The Chinese currency has come under particular pressure in recent weeks, falling to a two-year low against the dollar on Monday while investment banks lowered their near-term forecasts, due in part to the economy’s slowing momentum.

China’s central bank said on Monday it will cut the amount of foreign exchange reserves that financial institutions must hold, a move seen as aimed at slowing the pace of the yuan’s recent depreciation.

The central bank’s Deputy Governor Liu said that, in the longer term, the yuan would be more widely used internationally and would not be a one-way bet in the markets.

"International recognition of yuan will be strengthened and this will be a long-term trend. But in the short run, two-way volatility is a norm," he said.

The government has pledged to lay out detailed plans this month to implement 19 new policies announced in late August, to bolster the economy and supplement 33 measures unveiled in May.

But analysts expect the effects will be diluted due to tighter virus controls ahead of the politically sensitive Communist Party Congress in October, when President Xi Jinping is expected to secure a precedent-breaking third term as China’s top leader.

Senior leaders have played down the necessity of hitting the government growth target of around 5.5% for 2022, which analysts said had been looking increasingly unattainable under Beijing’s persistent zero-COVID strategy.