Fiscal stimulus will continue to hold up growth with the recent acceleration of new project approvals and large-scale projects in the coming years in roads, railways, telecommunications (including rolling out of 5G) and energy, and the continued reconstruction of dilapidated houses. Amid falling investment efficiency, greater attention should be paid to the pricing of risk to reduce the misallocation of capital. Removal of implicit guarantees to state-owned enterprises and other public entities would help. The impact of tax cuts aimed at boosting consumption may be mitigated by adverse confidence effects. Relaxation on car purchases and other measures may provide a short-term lift to consumption (and aggravate pollution problems), but to fully stimulate consumption, structural reforms should be accelerated. In particular, urbanisation and more inclusive public policies are needed. Abolishing the differences in public services that people with different household registrations can access would create more equal opportunities. A minimum level of public services should be ensured through better allocation of resources to provide more equal opportunities to individuals regardless of their place of birth. Central funding for basic public services, such as education and health, is needed to ensure a sufficient level of service provision.
Monetary policy was tightened somewhat over the past couple of years by restrictions put on shadow banking and wealth management activities, which were necessary to maintain financial stability. This heightened risk aversion and affected disproportionately smaller banks and private and smaller firms. Some smaller banks relying on interbank funding defaulted, which required government intervention. As the government did not bail out all creditors, this should sharpen risk perception and goes in the right direction toward phasing out implicit guarantees.
Private and small firms have difficulty in accessing formal lending channels and face continued high interest rates. To drive down borrowing costs, the central bank lowered the one-year medium-term lending facility rate by 5 basis points in early November. It had earlier changed the pricing mechanism for loan prime rates, linking the one-year lending rate on new corporate borrowing to rates set during open market operations (i.e. the PBOC’s medium-term lending facility, the MLF), which is determined by broader financial system demand for central bank liquidity. Getting access to loans at rates that better reflect funding conditions will improve the transmission mechanism. In addition, the lowering of the reserve requirement ratio for the so-called city commercial banks – smaller banks with local government ownership that mostly serve the local economy – in addition to the across-the-board cut should help to alleviate the credit squeeze for micro, small and private enterprises. Corporate debt remains high at 155% of GDP, in particular in the state-owned sector.
