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China must maintain coronavirus stimulus to ensure full economic recovery, says prominent Beijing adviser

South China Morning Post logo South China Morning Post 20/11/2020 Frank Tang
a man wearing a suit and tie: Prominent economist Liu Shangxi says China should not scale back the economic stimulus it rolled out to combat the coronavirus until it has ensured a full recovery. Photo: Weibo Prominent economist Liu Shangxi says China should not scale back the economic stimulus it rolled out to combat the coronavirus until it has ensured a full recovery. Photo: Weibo

China should maintain its monetary and fiscal stimulus to consolidate its post-coronavirus economic recovery and counter a highly uncertain global environment, a prominent government adviser has said.

"It's inappropriate to exit macroeconomic policy soon. Otherwise, it could risk falling short of success," Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, an affiliate of the Ministry of Finance, said in an exclusive interview with the South China Morning Post.

"The stability and continuity of economic policies should be maintained."

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The comments by Liu, who is prominent in Beijing's economic circles, reflect a cautious outlook for recovery in an ongoing debate over how the country should balance its policy objectives.

From a long-term perspective, we mustn't have high expectations. There is already a bipartisan consensus (in Washington) to contain China
Liu Shangxi

China's leaders have decided to reduce reliance on an increasingly turbulent external environment and switch to a dual circulation economic strategy, which will focus on leveraging China's huge domestic market for growth.

Nevertheless, Liu recommended China reach out to the incoming Biden administration in the United States to reduce tensions and improve the international trading environment. But he warned only so much could be achieved.

"From a long-term perspective, we mustn't have high expectations. There is already a bipartisan consensus (in Washington) to contain China," he said, adding the only difference between a Whitehouse under Joe Biden and Donald Trump would be "tactics and methods".

China is likely to be the only G20 country to report positive economic growth this year, which has shored up confidence in Beijing and provided officials with some leeway.

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It also fuelled an internal debate over when, and at what pace, economic stimulus should be withdrawn.

Speaking at last weekend's Caixin Summit, former finance minister Lou Jiwei said the government should carefully study how to withdraw policy stimulus without bursting China's large debt bubble.

Liu, who called earlier this year for the central bank to directly fund the government's fiscal deficit, said the Chinese economy grew just 0.7 per cent rise in the first nine months of the year and economic momentum was weak.

It will take a long time for companies, especially small firms that have been hit the hardest, to offset the sudden shock caused by the pandemic, he said.

A number of private economists agree that China should not be in a rush to withdraw economic stimulus.

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"We have yet to see the convincing rotation in demand needed for a self-sustaining recovery," Shaun Roache, chief Asia-Pacific economist, said in a note released on Thursday.

The government has spent about 9 trillion yuan (US$1.3 trillion) to fight the coronavirus pandemic, stabilise the economy and provide support to businesses and individuals this year.

The finance ministry budgeted for a record high deficit, equal to 3.6 per cent of gross domestic product (GDP), and issued 1 trillion yuan of special treasury bonds to help local governments fund infrastructure projects.

The People's Bank of China (PBOC) has also allocated 1.8 trillion yuan of new liquidity directly and injected several trillion yuan more through three cuts in banks' reserve requirements and open market operations.

As to whether (the PBOC) should exit its monetary stimulus, I think it's not the right time, not even for a marginal tightening
Liu Shangxi

The sudden rise in government spending has exerted significant pressure on the country's fiscal position, which was hit by 2.36 trillion yuan worth of tax cuts last year and falling tax revenues this year.

National fiscal revenue - taxes and fees - dropped 15.9 trillion yuan in the first 10 months of the year, down 5.5 per cent compared to a year earlier, while spending fell 0.6 per cent to 18.9 trillion yuan, government data showed.

Despite the worsening fiscal situation, Liu believed there was still some room for further fiscal stimulus.

"As to whether (the PBOC) should exit its monetary stimulus, I think it's not the right time, not even for a marginal tightening," he said.

Top Chinese central and provincial policymakers will convene next month for the Central Economic Work Conference, which will lay out targets for economic growth, fiscal deficit and monetary supply growth, among other areas.

The PBOC, while pledging to ensure reasonable liquidity to China's financial system, has explicitly rejected unlimited policy easing like many Western countries, after taking on a huge amount of debt during the 2008 global financial crisis.

Zhou Chengjun, head of the central bank's finance research institute, said on Wednesday that "there's not much room to slash (interest) rates further".

Liu argued the nation's debt-to-GDP ratio should not be the sole focus of economic policy, warning in particular against a rapid reduction in the debt, which "could bring other forms of risk".

Local governments should adjust their expenditures, restructure existing debts, liquidate assets or issue new bonds for debt repayment
Liu Shangxi

Recent bond defaults by local government-owned enterprises, such as Huchen Auto, the Chinese partner of BMW, and Yongcheng Coal, a miner in the central province of Henan, were due to a liquidity mismatch, Liu said.

He warned that the risks of corporate bond defaults could spread to other markets, saying there needed to be closer coordination between monetary and fiscal authorities.

China's huge level of local government debt, with 25.8 trillion yuan of on-budget loans and potentially many trillions more in terms of implicit liabilities, was another concern for Liu.

"Local governments should adjust their expenditures, restructure existing debts, liquidate assets or issue new bonds for debt repayment," he said.

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This article originally appeared on the South China Morning Post (www.scmp.com), the leading news media reporting on China and Asia.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.

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