Chinese hold back on spending even during National Day holiday season

China will announce new fiscal policies on Tuesday, including an expansion of public spending, following the September 24 introduction of a massive monetary easing program aimed at stimulating the economy. With signs of trouble in meeting the government's 5 percent GDP growth target, the move is seen as an attempt to reignite economic recovery by injecting funds directly after providing liquidity.

Zheng Shanjie, chairperson of the National Development and Reform Commission, the agency in charge of China’s macroeconomic policy, will hold a press conference. According to the State Council Information Office on Monday, the topic will be: 'Systematically implementing a package of incremental policies to solidly promote economic growth, structural optimization, and sustained development momentum.' Incremental policies refer to expansionary economic measures that include government investment and the expansion of state-owned enterprises' fund operations. Accordingly, the government is expected to announce plans to expand public spending through large-scale government bond issuance.

China's central bank, the People's Bank of China, announced on September 24 that it would lower the reserve requirement ratio by 0.5 percentage points to provide 1 trillion yuan (about 190 trillion won) in liquidity. At the same time, it stated that the seven-day reverse repurchase agreement rate, which serves as a short-term benchmark interest rate, would be cut by 0.2 percentage points, and interest rates on existing mortgages would be lowered by an average of 0.5%.

The Chinese government's unusual simultaneous lowering of both the reserve requirement ratio and policy rates suggests that Beijing has recognized it can no longer delay in pulling its economy out of deflation (falling prices during a recession) in order to boost growth. China's GDP growth was above target at 5.3% in the first quarter but slowed to 4.7% in the second quarter, falling below market expectations. With the third quarter forecasted to be in the 4% range, the government has started to take action.


Chul-Jung Kim tnf@donga.com