Policy focus shifts to growth stability, risk prevention

Policymakers will optimize policy tools further to achieve a balance between growth stability and risk prevention in the long term, as part of the ongoing efforts to counteract the impact of the COVID-19 epidemic and sustain economic recovery, experts said on Friday.

The comments came after a high-level meeting on Thursday indicated that China would prefer to avoid risks from excessive stimulus measures and instead focus on tackling long-term structural issues.

The meeting, held by the Communist Party of China (CPC) Central Committee Political Bureau, called for effective macroeconomic policies to ensure stability in the second half of the year and to achieve the annual economic targets, Xinhua News Agency said in a report.

Before launching the new policies, however, it is important to evaluate the overall risks and challenges for economic development and separate the COVID-19 epidemic-linked factors from the normal macroeconomic changes, said Gao Peiyong, vice-president of the Chinese Academy of Social Sciences.

"The other target is to ensure that there are no spillover effects from the strong stimulus measures," said Gao. "What this means is that the cost factor needs to be gauged before enacting countermeasures to offset the negative economic impact. At the same time, it is also important to exit from some of the special policies at the proper time."

Part of this reasoning lies in the fact that excessive stimulus costs are often blamed for the debt pileup, rising leverage levels, and possible asset price bubble-bursts, all of which could possibly lead to financial turmoil and a distressed economic outlook in the long term.

"More details on the short-term policy stance emerged from the meeting," said Lu Ting, chief economist in China with Nomura Securities."It is still too early for Beijing to unwind or roll back the easing and stimulus measures introduced in the first half of this year, but it may be reluctant to roll out fresh stimulus measures in the second half."

Fiscal policy should be more proactive, focusing on the "actual effects". It needs to ensure funds for construction of major projects pursuing high quality and efficiency, said the statement.

Economists expect Beijing to press ahead with its prestated fiscal budget objectives and government bond issuances.

At the meeting, the authorities also decided to opt for a more flexible and appropriate monetary policy with targeted measures, so as to maintain reasonable growth in money supply and aggregate financing, and guide down financing costs.

Measures would also be enacted to use the increased funds for manufacturing and smaller businesses. Fiscal and monetary policies will also be in sync with employment, industrial and regional development policies to boost growth, it said.

Much of the monetary action will hinge on "precision targeting" as there are no major changes to the overall policy tone, according to economists from Goldman Sachs.

"The overall tone of the statement was less dovish than the previous meetings, though not as neutral as we expected," said Song Yu, an economist with Beijing Gao Hua Securities Co Ltd. "However, we do not expect the policy stance to become less supportive than it has been since late May."

Song said that his team recently lowered expectations for additional cuts in reserve requirement ratio and interest rates. "In our view the tone of the statement only slightly lowers the probability of further cuts during the rest of the year," he said.