China seeks policy mix to boost economic resilience

Aware of the challenges at home and abroad, China has been seeking a policy mix featuring diversified monetary tools, fiscal support and a firm commitment to opening-up to keep the economy running within an appropriate range.

Owing to a low comparison base and consolidating recovery, China's economy expanded 12.7 percent year on year in the first half of 2021, but the evolving COVID-19 pandemic and unbalanced domestic rebound still call for more attention on downward pressures.

Noting the headwinds in a key meeting last week, the Political Bureau of the Communist Party of China (CPC) Central Committee stressed the need to maintain consistent, stable and sustainable macro policies, and sound coordination to mesh this year's policies with those for 2022.

CROSS-CYCLICAL ADJUSTMENT

The meeting emphasized "cross-cyclical adjustment" in macro-economic policies, a term analysts interpreted as a focus on boosting economic resilience in the short term while allowing policy leeway for future uncertainties.

The proactive fiscal policy should generate a greater effect, while the prudent monetary policy should maintain reasonably ample liquidity and support the continued recovery of small and medium-sized enterprises as well as industries under stress.

"We believe that policies will become more discretionary, and we should not expect rapid policy relaxation in the near term," said a research note by China International Capital Corporation Limited (CICC).

China's central bank in July cut the reserve requirement ratio (RRR) by 50 basis points for eligible financial institutions to drive down financing costs and boost the real economy.

Nomura Securities believes that the probability of another universal RRR cut is limited, and the central bank may prefer the use of low-profile tools to inject long-term liquidity.

On the fiscal front, the issuance of government bonds has been relatively slow this year as the relatively strong economic momentum has reduced the need for fiscal support.

"We think the issuance quota of local government bonds may remain underused in 2021, and the issuance may continue towards early 2022 to support economic growth in early next year," said the CICC report.