Via Financial Times

Wang Erping is counting on a new round of government stimulus to keep his barbecue restaurant in central Beijing afloat in the wake of the coronavirus pandemic.

The existing virus relief subsidies, including a four-month exemption on social security payments and a three-month extension of loan repayments, were not enough to lift Mr Wang out of trouble as sales fell to less than a third of their pre-outbreak level.

“There is no way I can handle the crisis on my own,” said Mr Wang, who is hoping for a deeper tax cut and long-term debt relief. “The government must act more aggressively to stop the economy from sliding.”

This belief has gained a strong following in China, as the country grapples with the economic fallout from the pandemic and renewed trade tensions with the US.

The pressure for more government support comes ahead of Friday’s National People’s Congress, the country’s annual gathering of lawmakers, where analysts expect more robust measures to be unveiled.

“The NPC will send a clear signal on the level of economic stimulus in the coming months,” said Bo Zhuang, an economist at TS Lombard, the research group. “It is going to be a strong one, but a runaway building boom is unlikely to happen given the long-term damage it does to the economy.”

Beijing has already cut taxes, extended bank loans and handed out consumer coupons, measures that spurred a pick-up in credit growth.

Medium- to long-term corporate loans, a big source of funding for construction, almost doubled in April from a year ago after state-controlled lenders increased support for infrastructure projects.

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Local government investment vehicles, the nation’s main builder, raised a record Rmb1.6tn ($22.6bn) from the bond market in the first four months of this year, a 78 per cent jump from a year earlier.

At the same time, the regulator has shown greater tolerance for debt risks, once a vital policy concern. The People’s Bank of China, the country’s central bank, said in a statement last week that it would allow the economy’s leverage ratio to pick up “provisionally” to help the real economy.

Yet the measures have not been enough to offset the economic pain. Despite a surge in bond issuance, many local governments are running out of funds after the pandemic took a toll on fiscal revenue.

In the central city of Ningguo, the local finance bureau said in a statement last month that it was facing “unprecedented” financial stress after the virus reduced tax income by 16 per cent in the first quarter of this year.

Factories have resumed operations under strict health restrictions but worries remain about a second wave of infections and an uncertain global economy © AFP via Getty Images

Analysts said the NPC might unveil bolder moves to support the economy.

Lou Jiwei, a former finance minister, said in a speech last month that China’s budget deficit, pending approval by the congress, could exceed Rmb3tn, or 16 per cent of fiscal revenue this year thanks to tax cuts and the economic downtown.

The NPC could also approve more than Rmb1tn in special treasury bonds and a doubling of infrastructure bonds to Rmb4tn this year from 2019, according to CICC, a brokerage.

Another closely watched stimulus indicator will be the economic growth target. While there have been reports that the goal could be dropped because of the threat of a second wave of infections and an uncertain global economy, most analysts expect Beijing to maintain the number as it gives local officials guidance on how far they should push ahead with the stimulus.

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“The absence of a GDP target will make people feel the economy is in real trouble,” said Zong Liang, chief researcher at Bank of China. Mr Zong expects Beijing to set full year growth at 2-3 per cent, suggesting a considerable rebound in economic activity in the coming months.

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However, any stimulus will probably still fall short of measures taken in the west, where central banks, led by the Federal Reserve, have embarked on aggressive interest rate cuts and unlimited purchases of government bonds.

In contrast, the PBoC was slow to cut costs of capital with the benchmark one-year loan prime rate dipping a mere 30 basis points since the outbreak. The Chinese central bank has also shrugged off calls from a think-tank backed by the finance ministry to purchase government bonds from the primary market to offset the fiscal deficit.

Wu Xiaoling, a former deputy central bank governor, said in an article this month that the government should “try its best” to reduce the budget deficit and count on private capital to meet stimulus needs.

That has raised questions on how effective the stimulus could be. Analysts said a significant portion of new government bonds might end up offsetting tax revenue losses or paying off existing debt instead of financing physical projects.

“Local governments need to solve their financial problems first before investing in new construction,” said He Wei, an analyst at Gavekal Dragonomics in Beijing.

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A lack of lucrative projects could also limit the impact of a stimulus package. Jin Yongxiang, general manager of Beijing-based Dayue Consulting, which advises on local government financing, said China’s demand for infrastructure, the main focus of stimulus investment, was softening as many projects had already been built.

“There is a limit in how many more roads and bridges China needs,” said Mr Jin.