The broad policy direction for many of the world’s central banks and governments now hinges on one question: how will the Chinese government respond to the economic shock caused by the coronavirus?
The Communist Party’s elite Politburo has urged the nation to meet its economic targets this year, an imperative that could shake the government’s recent reluctance to fire up large-scale stimulus.
If it translates into an all-out loosening of monetary policy and a ramp up in government spending, key trading partners that have been slammed by the hit to exports, supply chains, commodities and tourism may see short-term pain followed by a rapid snap back.
Much depends on which levers China pulls. Near-term options include further cuts to central bank funding rates and more tax relief to hard-hit sectors as well as flush liquidity for the financial system. The emphasis for now remains on not over-doing it, though there are signs the resolve is softening.
The People’s Bank of China could further cut the proportion of deposits banks must hold as reserves. Local governments are being allowed to speed up bond sales to fund infrastructure like highways and health facilities.
Economists from Goldman Sachs Group Inc to UBS Group AG and BNP Paribas SA see more easing steps ahead.
Real gross domestic product is now forecast to grow 5.8 percent this year, according to the median result in a Bloomberg survey, down from 5.9 percent last month. That would be the weakest in three decades.
The unknown is whether officials will really relax their rigid clampdown on borrowing in an economy where total debt is heading toward 300 percent of national output, making financial stability a political priority.
“The key for China’s trading partners is not so much the composition of China’s stimulus but, rather, that the stimulus is tailored to reflect the features of the shock,” said Nathan Sheets, a former Fed official who is now chief economist for PGIM Fixed Income.
China’s factories are vital links in the supply chains for multinational companies. Hubei province, an industrial powerhouse with an economy the size of Sweden’s, remains in lock-down while a mix of curbs on factory production and travel remain in place elsewhere too, complicating the task of getting the economy back up to speed.