China’s stimulus tops $5 trillion as Covid Zero hits economy

(Bloomberg) — China’s plans to boost growth as Covid outbreaks and lockdowns squelch activity will inject a whopping $5.3 trillion into its economy this year.

The figure — based on Bloomberg’s calculation of monetary and fiscal measures announced so far — is equivalent to about a third of China’s $17 trillion economy, but is actually lower than the stimulus in 2020, when the pandemic first struck. That suggests even more could be spent if the economy doesn’t recover from its current funk — a possibility raised by Premier Li Keqiang earlier this week.

“The mainstay of policy this year is tax spending and government investment, while the central bank has only played a supportive role so far,” said David Qu, China economist at Bloomberg Economics. “There is still plenty of scope for stronger fiscal policies that now support growth more effectively.”

Bloomberg’s calculation of the financial support pledged so far for 2022 is 35.5 trillion yuan. On the fiscal side, we added China’s general budget spending with the amount of money spent through local government special bonds, as well as tax and fee cuts. Monetary support includes hundreds of billions of yuan in liquidity to be released by the People’s Bank of China through policy loans, cuts in bank reserve ratios, and cheap loans to support small businesses and green projects during the pandemic.

The world’s second-largest economy has come under intense pressure to meet the government’s growth target of around 5.5% for the year. As Shanghai and other cities and regions went into lockdown this spring to contain Covid outbreaks, industrial production and consumer spending fell to their lowest levels since early 2020.

Read more: China’s stimulus won’t bail out global economy like it did in 2008

While authorities have vowed to meet their economic goal, political leaders have also made it clear that they stand by Covid Zero, leading to skepticism among economists as to whether Beijing can achieve both goals simultaneously.

The fact that most of the stimulus was announced at the annual session of the National People’s Congress in early March, well ahead of most lockdowns, suggests authorities could announce more measures this year if necessary. However, the central bank is likely to tread cautiously, wary of deviating too far from restrictive policies elsewhere to tackle runaway inflation, or repeating a strategy similar to its response to the 2008 financial crisis, which resulted in a rising debt.

“China may need additional support if the economy continues to collapse rapidly,” said Ding Shuang, chief economist at Standard Chartered Group Plc. Credit growth is likely to pick up, he said, as the PBOC recently said the country’s debt ratio will rise this year. He also expected infrastructure financing to pick up, real estate lending to normalize, and targeted lending to sectors like small businesses and green projects to pick up.

Whatever China mobilizes in support this year, it’s still being eclipsed by the massive stimulus package that helped the economy return to its high-growth trajectory after the 2008 global financial crisis. The 4 trillion yuan of additional investment announced this year alone accounted for 13% of the economy. The PBOC was also more aggressive during this period, cutting its policy rate by more than 200 basis points in a single year and cutting the reserve requirement ratio by as many points.

“There are more challenges to support growth now than in 2008,” Qu said, adding that interest rate levels were high at the time, allowing the PBOC to provide greater stimulus. Investing was also more attractive as the economy grew faster. The rest of the world also increased stimulus to support the global economy.

Now he said, “China is facing all these problems alone.” State investment is the “only thing one can hope for in the short term,” he said.

Here’s a look at Beijing’s fiscal and monetary support this year:

PBOC Measures

The PBOC hasn’t eased much this year, having only cut interest rates by 10 basis points once in January. This contrasts with two cuts totaling 30 basis points in the first four months of 2020.

The central bank also cut the reserve requirement ratio — the amount of money banks are required to hold in reserve — a single time, less than the three cuts made up to this point in 2020. The ratio change in April, the first reduction since last December, released about 530 billion yuan of long-term liquidity into the economy.

The central bank has other tools in its arsenal besides adjusting policy loans and reserve ratios. It is increasingly making use of its reending program, which provides commercial banks with low-interest loans for targeted lending to small businesses and other sectors identified as needy.

The PBOC also announced plans to transfer 1.1 trillion yuan to the central government this year, resuming a practice suspended during the pandemic. This transfer replenishes the central government’s fiscal resources outside the general budget while increasing the amount of base money in the economy.

Up to 800 billion yuan has been remitted so far this year, a move equivalent to a 0.4 percentage point RRR cut.

Fiscal Measures

The bulk of government support this year will come in the form of fiscal stimulus, including an overall budget spending target of 26.7 trillion yuan — nearly 2 trillion yuan more than in 2021.

The rest of the money will come from tax cuts and rebates, along with a 3.65 trillion yuan quota for local government special bonds, a key source of funding for public projects such as infrastructure.

Also, according to Qu, 2 trillion yuan of over-budget revenue and under-budget spending remaining funds are available in the state fund account in 2021, which authorities can use for infrastructure and other public projects as needed.

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