China’s stimulus measures will shore up economic growth this year and next, but might undermine the nation’s drive to control debt and worsen structural distortions over the medium term, the Organisation for Economic Co-operation and Development (OECD) said in a report yesterday.
Beijing has stepped up fiscal stimulus to prevent a sharper slowdown in the world’s second-largest economy, which is being squeezed by weaker domestic demand and a trade dispute with the US.
Local governments are to be allowed to issue 2.15 trillion yuan (US$320.6 billion) of special purpose bonds this year to fund infrastructure projects, a jump of 59 percent from last year.
S&P Global Ratings estimated last year that local governments were already sitting on hidden debt that could be as high as 40 trillion yuan.
“Infrastructure stimulus could lift growth over the projection horizon, but it could lead to a further buildup of imbalances and capital misallocation, and thereby weaker growth in the medium term,” the OECD said in its latest survey of China’s economy.
“The stimulus risks increasing once again corporate sector indebtedness and, more generally, reversing progress in deleveraging,” it said.
China’s corporate debt has fallen to about 160 percent of GDP due to a multi-year clampdown on riskier types of financing and debt, but the level was still higher than in other major economies, the OECD said.
The government last month announced tax and fee cuts of 2 trillion yuan for companies this year, which would lift its budget deficit to 2.8 percent of GDP this year from 2.6 percent last year.
China’s fiscal stimulus could be as high as 4.25 percent of GDP this year, up from 2.94 percent last year, the OECD added.
Easier monetary policy should help reduce the risk of liquidity strains which could put further pressure on businesses, OECD deputy secretary-general Ludger Schuknecht said.
However, he said Beijing should prevent any policy “overshooting.”
Fiscal policy should aim to support the economy, while avoiding any side effects, he added.
“I’m sure government authorities and the PBOC [People’s Bank of China] are monitoring this carefully. It’s a matter of implementing it [stimulus] in the right way,” he told an event ahead of the release of the report.
New bank loans rebounded more than expected last month, capping a record 5.8 trillion yuan quarter, as policymakers push lenders to support struggling smaller, private companies, which are seen as higher credit risks than state-controlled firms, but there are concerns that looser lending standards might fuel a further rise in bad loans, as well as inefficient investment and speculation, particularly in the property market.
The PBOC has already slashed banks’ reserve requirement ratio five times over the past year and is widely expected to ease policy further in coming quarters to spur lending and reduce borrowing costs, but top officials have repeatedly vowed not to open the floodgates in an economy already saddled with piles of debt — a legacy of massive stimulus during the global financial crisis in 2008 and 2009, and subsequent downturns.
China’s economic growth is likely to slow to 6.2 percent this year — the weakest pace in nearly 30 years — and growth is expected to cool further to 6.0 percent next year, the OECD said.
The economy expanded 6.6 percent last year.
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