China will continue to adopt a series of incremental policies to further consolidate and accelerate its economic recovery from COVID-19 in the latter part of this year, economists said.
"It is estimated that apart from recently launched quasi-fiscal policy instruments, the Chinese government will provide additional fiscal funds worth about 1.5 trillion yuan ($222 billion) in the second half. The channels for capital replenishment include the issuance of local government special bonds, submission of increased profits of State-owned enterprises and revitalization of existing funds," said Yu Xiangrong, China chief economist at Citigroup.
Yu emphasized that infrastructure investment is becoming a strong foothold for China to stabilize growth. As traditional infrastructure is still underdeveloped and has weak links due to its unbalanced growth, industrial upgrade and transitions to cleaner, greener energy need large-scale "new infrastructure" investment.
"The government will comprehensively broaden infrastructure financing through channels like fiscal policies and policy banks. We expect that China's full-year infrastructure investment will increase by 7.7 percent year-on-year, up from 0.4 percent last year, and the growth rate will remain at around 5 percent in 2023," he said.
Infrastructure investment has enjoyed strong policy support, including an acceleration of local government special bond issuance and fresh 300 billion yuan funding from policy banks. Thanks to these fundings, infrastructure investment growth will likely stay high in the next few months, said Xiong Yi, chief China economist at Deutsche Bank.
基础设施投资近期获得了强有力的政策支持，如加快地方政府专项债券发行、政策性银行发行 3000 亿人民币金融工具等。德意志银行首席中国经济学家熊毅表示，未来数月内，基础设施投资增速有望在政策支持下维持在较高水平。
Most of the government's announced policies thus far are short-term in nature. Barring further policy announcements, fiscal policy might soon hit its annual budget constraints and debt ceilings, Xiong said.
Lian Ping, chief economist at Zhixin Investment and head of the Zhixin Investment Research Institute, agreed that the proactive fiscal policy will remain the main force to boost economic recovery in China in the second half.
The government needs to further accelerate fiscal spending, especially in areas like social security, employment, healthcare, and agriculture, forestry and water resources, Lian said.
"The majority of funds raised via the issuance of treasury bonds and local government bonds are expected to be used by the end of August. This will effectively support the implementation of major projects in China, and the impact of the nation's fiscal policy on stabilizing growth will further appear. At the beginning of the fourth quarter, China may front-load the 2023 special-purpose bond quota to satisfy continuously increasing financing needs, thus allowing macroeconomic policies to provide sustained support for growth stabilization," he said.
Because of the acceleration of government bond issuance and unleashed financing demand of businesses, China will see faster credit growth, and the liquidity of its banking system may become relatively tight for a certain period at the end of the third quarter or the beginning of the fourth quarter. As a result, the People's Bank of China, the nation's central bank, may cut the reserve requirement ratio again to meet funding needs boosted by accelerated economic growth in the second half, Lian said.
The PBOC may also lower relending rates for the agriculture sector and small businesses once more to support banks' further cuts to lending rates for micro, small and medium-sized enterprises, he said.