China needs more fiscal easing to reverse growth, says economist

China needs more fiscal easing to reverse growth, says economist

China could need more fiscal easing to get over a torrential rains and flooding, and the authorities' tough response to outbreaks of the highly-transmissible coronavirus Delta variant, economists say.

Nomura affected China GDP growth forecast for today to 5.1% in the fourth quarter and 4.4% in the third quarter, from 6.4% and 5.3%, respectively.

It also cut its full-year growth projection from 8.2% to 8.9%, citing the impact of Beijing's tough stance on COVID control due to the emergence of the coronavirus delta variant in many major cities.

While calling China's costly policy approach to containing the virus increasingly cost-intensive, Lu Ting, chief economist at Nomura said he expects Beijing to keep policy rates steady in 2018 in favour of a mix of targeted tightening and universal easing.

However, we believe these policy easing measures could be insufficient at reversing the growth downtrend, he said.

In past months China has moved towards modest infrastructure spending, while the Central Bank may slow down easing steps.

In a note, Goldman Sachs economists said they expect easing to focus on fiscal stimulus and government bond issuance, as well as a reduction in the reserve requirement ratio.

Standard Chartered, ING, OCBC Bank and Pinpoint Asset Management have also suggested possible further RRR reductions after the central bank surprised market with a broad cut in July.

Two RRR cuts in 2021 would not contradict the prudent monetary policy stance but would help to reduce corporate borrowing costs, prevent M 2 and TSF growth from slowing further and pre-empt GDP growth from slipping below 5% year-on-year in Q 4, said Li Wei, senior China economist at Standard Chartered.

These expectations pushed China's benchmark 10 year yield to a less than one year low of 2.7975% this week, after the latest Politburo meeting indicated no change in stance and as virus concerns and weak manufacturing data open the door to more easing.

But with local governments expected to issue more bonds to spark economic growth, the dip could be short-lived.

August could reach the peak of government bond supply with total net issuance of government bonds likely to hit 1 trillion yuan, said Liu Yu, analyst at Guangfa Securities.