Shift in policy to strengthen nation's growth

China's economic growth is expected to strengthen on a sequential basis amid the latest stimulus package and with more incremental policies in the pipeline, translating into over 5 percent year-on-year growth in the fourth quarter, analysts and economists said on Sunday.

They said a long-awaited policy shift is unfolding for China's economy and markets, as policymakers have pledged to strengthen countercyclical adjustment and step up fiscal policy support. This will include the largest debt resolution support in recent years, with a particular focus on addressing pressing challenges such as the prolonged housing downturn, debt issues and sluggish domestic demand.

Their comments came as data from the National Bureau of Statistics showed on Sunday that China's consumer prices rose at a slower pace in September, while the decline in factory gate prices continued, pointing to pressures on the world's second-largest economy and intensifying the need to roll out more incremental policies.

The country's consumer price index, the main gauge of inflation, rose 0.4 percent year-on-year in September, compared with a 0.6 percent increase in August. The producer price index, which gauges factory gate prices, dropped 2.8 percent last month, widening from a 1.8 percent fall in August, the NBS said.

"The slower CPI growth in September was mainly due to still-weak domestic demand, seasonal factors and the high comparison base in the previous year, while the deeper PPI drop was influenced by falling commodity prices, especially in the energy sector," said Zhou Maohua, a researcher at China Everbright Bank.

Shen Bing, director-general and a senior research fellow at the market and price research institute of the Chinese Academy of Macroeconomic Research, said the growth in CPI is expected to register a mild recovery while maintaining overall stability in the fourth quarter of the year.

This is because consumer demand has shown signs of pickup, with the sales of passenger vehicles and home appliances having improved, a trend that would be consolidated upon the implementation of incremental policies to expand domestic demand, Shen said.

On Saturday, the Ministry of Finance announced plans to soon introduce a comprehensive package of new targeted policy measures, with a key focus on improving the financial situations of local governments, facilitating the stabilization of a bottomed out property market, and enhancing the risk resilience and credit allocation capabilities of major banks, among other things.

The ministry said there is still ample room for the central government to borrow and increase its deficit. It plans to enhance the large-scale debt limit at once, replace the hidden debt of local governments, and increase support for local governments to resolve debt risks.

Chang Haizhong, executive director of corporates at rating agency Fitch Bohua, said this policy is the largest supportive debt measure introduced in recent years and will greatly alleviate the pressure on local governments.

"It is expected that the hidden debt of local governments may be replaced in large part by increasing the issuance of treasury bonds in the future," he said.

According to Chang, the current economic growth is under pressure and fiscal revenue is lower than expected, making some local governments more stretched financially.

"Once implemented, this policy will substantially reduce local fiscal pressure, unleashing fiscal funds for economic development and ensuring people's livelihoods. At the same time, the balance sheets of local government financing vehicles will also be strengthened," he said.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said his team estimates that the size of the announced fiscal stimulus package will be at least 4 trillion yuan ($566 billion), surpassing market expectations.

"It will directly drive GDP growth in the fourth quarter to rise above 5 percent, thereby helping achieve the annual growth target of around 5 percent this year," he added.

Lu Ting, chief China economist at Nomura, said he believes that much of the incoming fiscal stimulus will likely be used to fill the fiscal gap faced by local governments.

"In addition to the 200 billion yuan for strategic projects announced by the National Development and Reform Commission, we expect the country to increase fiscal transfers to local governments and give them a large quota for borrowing," he said.

Lu added that policymakers might consider an increase in spending on social security to help those with lower incomes and to encourage childbirth, and they will likely provide funding to those presold residential projects that have been delayed.

Wang Keju contributed to this story.