Economists see State Council's follow-up policies spurring demand

China's economic recovery will increase its momentum in the following months as the country is stepping up stimulus through follow-up measures that will fortify its policy package for stabilizing the economy, economists and analysts said on Thursday.

The foundation of the recovery is not solid amid renewed COVID-19 outbreaks since July as well as due to pressure from shrinking demand and weakening expectations, and the new policy measures will help boost domestic demand, stabilize employment and shore up growth, they said.

Despite facing headwinds and a complicated and grim environment both at home and abroad, China's economy will gradually stabilize quarter by quarter upon better control of the pandemic, they said.

More efforts, however, should be made to further spur consumption and better implement infrastructure construction projects. While adhering to the principle that "housing is for living in and not for speculation", the government should roll out more policies to stabilize the real estate market, they said.

Their comments came after the State Council's executive meeting chaired by Premier Li Keqiang decided on Wednesday that China will adopt follow-up policies on top of the policy package for stabilizing the economy and send task forces to certain localities to supervise and assist work on this front, in order to promote policy implementation at a faster pace.

The new stimulus package includes an incremental quota of at least 300 billion yuan ($43.8 billion) in policy-backed and developmental financial instruments, on top of the 300 billion yuan policy bank bonds announced as equity capital for key investment projects, and a new quota of around 500 billion yuan in local government special bonds, carried over from previous years, which is required to be fulfilled before the end of October.

Zhou Maohua, an analyst at China Everbright Bank, said the new incremental policies will help consolidate the recovery and help keep economic operations within a reasonable range.

For instance, the further use of policy-backed and developmental financial instruments will help increase funding support for key infrastructure, promote the implementation of those projects and encourage additional financing support from the private sector.

Zhou's views were echoed by Ye Yindan, a researcher with the Bank of China Research Institute. She said the stimulus measures became necessary as China's economic recovery was slower than expected amid downward pressure. They aim to support the recovery of demand, stabilize the overall economy and promote employment stability.

As the meeting stressed that the balance of the special bond quota worth over 500 billion yuan should be well utilized, Ye estimated that China may continue to issue new special bonds in the second half of the year, saying the country will likely see better-than-expected growth in infrastructure investment, which will play a crucial role in supporting the recovery.

According to the meeting, a set of infrastructure projects with mature conditions will be approved and launched, and the effect of the loan prime rate reform will continue to be harnessed to lower the costs of corporate financing and consumer loans.

Referring to the recent reduction in China's benchmark lending rates, Ye said there is still room for further reductions in China's over-five-year loan prime rate and the one-year LPR in the second half. Any such cuts would help further boost expectations as well as overall social demand.

Ye warned of challenges like sporadic COVID-19 outbreaks, which cannot be ruled out altogether, troubles in the property sector, and changes in the international environment. She called for more efforts to ensure a basic living for unemployed and low-income people, encourage running more promotions and sales on holidays, spur purchases of new energy vehicles and home appliances, better use special bonds for infrastructure investment and stabilize the property market.

Despite facing challenges, China's economy may gradually stabilize in the following months upon better containment of the pandemic and a package of stimulus policies taking effect, and full-year economic performance will likely stay within a reasonable range this year, said Zhou from China Everbright Bank.