Experts say policies must focus on expanding consumption, investment

China's post-COVID-19 economic recovery will rely on domestic demand after production resumption, and policy response should focus on expanding consumption and investment, economists said on Tuesday.

A meeting on Monday held by the Financial Stability and Development Committee under the State Council, China's Cabinet, vowed to support economic recovery by improving macroeconomic plans and creating effective demand.

It also vowed to optimize the supply structure and maintain liquidity at a reasonably ample level, according to a statement issued after the meeting presided over by Vice-Premier Liu He, who is also head of the committee.

Such signals are an indication that policymakers may strengthen counter measures to contain the economic fallout and unlock more growth potential. "A series of policies to stimulate consumption and promote investment will be deployed, to boost domestic demand and accelerate economic recovery," said Wen Bin, chief researcher at China Minsheng Bank.

"Compared with the production resumption, the rebound in demand is slower and external uncertainties may dim the recovery," Wen said.

Barry Eichengreen, professor of economics and political science with the University of California, Berkeley, said: "The time for using fiscal policy for stimulus is when it's safe for people to go back to work. So I think that time has come in China." Eichengreen's comments were made at a recent seminar held by the China Finance 40 Forum.

The annual session of the National People's Congress, China's top legislature, will start on May 22, according to Xinhua News Agency. It has been postponed by more than two months compared with the original plan, due to the COVID-19 outbreak.

Whether the government will set an explicit GDP growth target for this year at the NPC meeting is still uncertain, due to the severe blow from the virus on the global economy. The slumping external demand may drag economic recovery in the second quarter, after the unprecedented contraction of 6.8 percent in the first three months, said analysts.

"We expect China's 2020 GDP growth target to be no higher than 3 percent and could be in a wider range than before, such as 2 to 3 percent, to provide more flexibility for policymaking," said Lu Ting, chief economist in China with Nomura Securities. "It is also likely to only set the growth target for the second half instead of the whole year."

Expectations are that a stimulus package, especially for a more expansionary fiscal policy, will be launched during the upcoming NPC meeting. The fiscal deficit target may rise to higher than 3 percent of GDP to support stronger government spending, especially on infrastructure, consumer durables and financial relief to help smaller businesses to survive the COVID-19 crisis.

Lou Jiwei, former finance minister, said that China is likely to raise the fiscal deficit target to 5.8 percent, compared with 2.8 percent in 2019. The issuance of central government special bonds and local government special bonds, as the off-budget debt, may be close to 5 trillion yuan ($708.2 billion).

Other specific measures include strengthening fiscal transfer to local governments, increased financial relief for the lower-income group, small and medium-sized enterprises, and issue of more consumption vouchers, economists said.

Steven Barnett, the International Monetary Fund's senior resident representative in China, expected a V-shaped recovery after a large fallout, but rising unemployment and stressed property developer funding may pose further risks to growth.

He said that a comprehensive and coordinated policy response is still needed, including supporting domestic demand and containing external pressures, to mitigate the impact of the virus.

China and other Asian countries "should do whatever it takes, but tailored to circumstances," said Barnett, such as using central bank balance sheets flexibly to support small and medium-sized enterprises, and take advantage of the high domestic savings rate.