China Economists Ramp Up Expectations for Rate Cuts, Spending

China may raise its budget deficit to the highest in three decades and make the deepest interest-rate cuts since 2015 following the boldest stimulus signals from its top leaders in years, according to economists.

At least seven Chinese brokerages forecast that next year’s fiscal deficit target could reach 4% of gross domestic product, the widest since a major tax reform in 1994. Beijing has historically kept its budget deficit ratio at or below 3%.

Six of the brokerages expect policy rate cuts of 40 to 60 basis points next year, echoing earlier predictions from several foreign banks, according to research notes published since late Monday after a meeting of top leaders.

The bullish views were triggered by strong commitments from the Communist Party’s decision-making body to boost growth with a “more proactive” fiscal policy. The Politburo also signaled a shift to a “moderately loose” monetary policy, away from the “prudent” approach maintained for about 14 years.

The meeting “fully reflected top leaders’ determination to push for the economy’s continued improvement and to lift market confidence,” economists from Yuekai Securities said in a note Tuesday.

China’s economy has shown signs of revival in recent months after officials rolled out a broad stimulus package. But its longer-term outlook remains uncertain amid the threat of a potential second trade war with the US and persistently weak domestic demand.

President Xi Jinping said on Tuesday that China is fully confident in achieving its economic growth target this year, adding that there will be no winners in any trade or technology wars, according to state media reports.

A larger fiscal deficit means the government will borrow more to fund increased public expenditure, which could help boost domestic demand as companies and households reduce spending and investment. 

There are other forms of public borrowing not included in the headline deficit figure, which may still be expanded to support the economy. These include local government special bonds, which have been a major source of funding for infrastructure projects, and special treasury bonds, used for strategic projects and funding trade-in programs for consumer products and equipment.

Chang Shu, Eric Zhu and David Qu from Bloomberg Economics Said: “China looks set to unleash the strongest wave of stimulus in years to spur the economy, based on signals from the Politburo meeting. A shift in monetary policy to a stance used during the global financial crisis and a pledge to be more proactive with fiscal policy signal a strong commitment to lifting growth.” 

Economists expect the People’s Bank of China to make significant cuts to the reserve requirement ratio, or the amount of cash banks must hold in reserves. China Galaxy Securities sees a reduction of up to 250 basis points next year, more than double the 100 basis points cut so far this year.

The Politburo also pledged to introduce “extraordinary” counter-cyclical measures next year for the first time, likely hinting at the use of unconventional tools to boost growth and confidence. They called for stabilizing the property and stock markets, highlighting the importance of these assets, which account for the majority of household wealth.

To this point, economists at Zheshang Securities suggested that the central government — instead of local authorities — might purchase unsold homes. They also raised the possibility of issuing nationwide consumption vouchers or providing subsidies for lower-income groups, according to a note.

Others, including analysts at Guosheng Securities, flagged the potential creation of a stabilization fund to support the stock market. In late September, central bank Governor Pan Gongsheng said the country was studying setting up such an entity, though he didn’t provide further details.

“We’re still waiting for a lot more of the details,” Tai Hui, Asia Pacific chief market strategist at JPMorgan Asset Management, told Bloomberg Television on Tuesday. “The fact is when you’re looking at the global environment, it’s getting more uncertain, getting more volatile.”