Analysts Demand More Robust Fiscal Policies to Stimulate Demand

A recent report from the think tank China Finance 40 Forum (CF40) released on Monday has called on policymakers to expedite interest rate cuts and enhance government spending in order to stimulate demand.

Analysts Demand More Robust Fiscal Policies to Stimulate Demand
A recent report from the think tank China Finance 40 Forum, released on Monday, called on policymakers to expedite interest rate cuts and enhance government spending in order to stimulate demand.

In an effort to support economic growth, China has recently rolled out a series of initiatives, including interest rate reductions. However, these actions have sparked concerns regarding their potential effects on bank profitability.

The CF40 report emphasizes that lowering policy rates is essential to combat inadequate demand. While acknowledging the central bank's awareness of the risks posed to bank profitability, the report argues that the costs associated with inaction may be far more significant. Persistently weak demand could result in a rise in non-performing loans and increased pressure on bank margins.

Throughout this year, the five-year Loan Prime Rate, which serves as a key benchmark for mortgage rates, has been cut by a total of 60 basis points in three separate reductions. Recent policy actions have included a reduction of 20 basis points in the policy rate and a 50 basis points decrease in the reserve requirement ratio for financial institutions.

"It is true that some financial institutions may face bankruptcy pressures," stated Zhang Bin, a senior fellow at CF40. "However, this does not justify a reluctance to cut interest rates. The central bank can take necessary measures to address troubled financial institutions."

The report also recommends that, to effectively stimulate demand, government spending should outpace the combined growth target for GDP and inflation. Zhang elaborated that if China targets a 5 percent GDP growth and a 2 percent inflation rate for the coming year, government spending should increase at a rate greater than 7 percent. Zhang noted that in the years leading up to the pandemic, growth in China's broad-based fiscal expenditures had surpassed 10 percent.

Guo Kai, another senior fellow at CF40, supported Zhang's perspective, stressing the importance of establishing a nominal GDP target to tackle the challenges presented by a low-interest-rate environment. If real GDP growth begins to falter, policymakers could then adopt expansionary fiscal or monetary policies to stimulate inflation and sustain economic momentum.

Analysts express optimism regarding the recent comprehensive policy package, believing that the effective execution of these measures will be pivotal in maximizing their benefits and establishing a foundation for sustainable economic growth in the future.

Navid Kalantari for TROIB News