U.S., CHINA DIFFER ON ECONOMIC STIMULI TO OVERCOME PANDEMIC
The US and China are pursuing divergent economic policies in the aftermath of the coronavirus recession in a role reversal from last time the world economy was recovering from a shock, Chris Anstey, Enda Curran and Rich Miller reported for Bloomberg News.
One of the takeaways from the annual National People’s Congress underway in Beijing is a conservative growth goal, with a tighter fiscal deficit target and restrained monetary settings. China’s reluctance toward the kind of “go big” message of Treasury Secretary Janet Yellen dates back many years.
After unleashing a fiscal package of 4 trillion yuan ($586 billion, at the time) and an unprecedented surge in broader credit after the 2008 crisis, Beijing was already by 2012 saying it wouldn’t do that again. After ditching an annual growth target for 2020 given the turmoil caused by COVID-19, China’s leadership set a goal of a GDP increase of more than 6% this year -- conservative since it’s well below economists’ projections for this year’s expansion, Zoe Schneeweiss also reported for Bloomberg News.
That’s a big contrast with Washington, where President Joe Biden is preparing a second major fiscal package after he gets final approval for his $1.9 trillion stimulus. The widening policy divergence is putting strains on exchange rates and could potentially reshape global capital flows. It stems, in part, from different policy lessons from the 2007-2009 crisis.
A stunted and choppy US recovery left key Democrats concluding it’s vital to “go big” on stimulus and keep it flowing. For monetary policy, the moral was: “Don’t hold back” and “don’t stop until the job is done,” Federal Reserve Chair Jerome Powell said last week. China’s leaders have a different take.
A massive unleashing of credit growth back then led to unused infrastructure, ghost towns, excess industrial capacity, and an overhang of debt. While rapid containment of the pandemic meant the economy didn’t need as much help in 2020, President Xi Jinping and his team are now winding things back to re-focus on longer-term initiatives to strengthen the technology sector and tamp down debt risks.
“Each learned a lesson from the previous episode, and so it is kind of a swap of positions,” said Nathan Sheets, head of global economic research at PGIM Fixed Income and a former US Treasury undersecretary for international affairs. The policy mix now makes “a compelling case for renminbi appreciation,” Sheets said.
That’s a view that’s widely shared: the median forecast is for strengthening to 6.38 against the dollar by the end of the year, from 6.5238 in Hong Kong on Monday afternoon. One of China’s financial regulators, Guo Shuqing, highlighted in a briefing just days before the opening of the annual legislative gathering that high leverage within the financial system must continue to be addressed.
Guo pointed to worries about inflated property prices and the risk of overseas money pouring in to take advantage of the premiums China’s assets offer. He also indicated the nation’s lending rates will likely go up this year.