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China announced new debt financing plans and additional rate cuts after the quarterly economic contraction in order to limit the effects of the novel coronavirus pandemic and ensure that the economy is better placed to recover, according to officials and analysts.
The Ministry of Finance announced on Monday it would raise the front-loaded quota of local government special bonds by another 1 trillion yuan ($141.3 billion). Issuance of the increased quota should be finished by the end of May. Most of the debt is for infrastructure construction projects.
On the same day, the People's Bank of China, the central bank, cut the benchmark lending rate — the loan prime rat — by 0.2 percentage point. It was the largest cut since the rate was launched in August 2019. Experts said the move is to lower financing costs for government and corporate sectors and accelerate business resumption.
China's top-level policymakers held a meeting on Friday in which they said the country will use stronger macro policy tools to cushion the economic fallout. In the first quarter, China's GDP fell 6.8 percent year-on-year amid lockdowns, while indicators suggested a substantial recovery of business activities in March.
The sudden virus outbreak had an "unprecedented impact" on China's economic and social development, which was "extremely unusual" in the first quarter, said a statement issued after the meeting of the Political Bureau of the Communist Party of China Central Committee.
The meeting was presided over by Xi Jinping, general secretary of the CPC Central Committee. It called for more proactive fiscal measures, including raising the fiscal deficit ratio, issuing special central government bonds and increasing the quota of local government bonds, to help stabilize the economy.
Monetary policies should be more flexible, leveraging policy tools such as cutting reserve requirement ratios and interest rates, as well as relending, to maintain reasonably ample liquidity and guide the market lending rates to decline. Capital should be channeled into the real economy, especially to support medium, small and micro enterprises, the meeting stressed.
As the COVID-19 pandemic spreads around the world, experts highlighted risks of prolonged external challenges, and called for more policy support for business resumption, especially to assist small and medium-sized enterprises with financing difficulties, and accelerate the boosting of infrastructure investment.
"Economic recovery is expected to continue and to show up in the GDP data from the second quarter onward as more progress is made with the return to economic normalcy," said Louis Kuijs, head of Asia Economics at Oxford Economics, a British think tank. "But the upturn will be slowed down by lingering consumption weakness and sliding foreign demand."
"The stance of policymakers is key. So far, policy easing has remained modest. While we see more measures in the coming months, we don't expect large stimulus," he said.
