China Fiscal policy

China revealed targeted stimulus package

China announced Wednesday a mini stimulus package. The package includes additional spending on railways, upgraded housing for low-income households and tax relief for struggling small businesses.

The new stimulus is featured by its targeted spending. I think it is a smart macroeconomic strategy.

Recent economic data suggestion modest slowdown in the GDP growth in China. Small businesses have been suffered more as shown by the HSBC China Flash PMI which fell to an eight-month low of 48.1 in March. Another index, China official PMI, was 50.3 in March, a touch higher than in Feb, and showed expansionary. The HSBC Flash PMI focuses on small business and the China official PMI includes large companies. So a tax relief will help the small businesses in particular.

Fiscal stimulus has two advantages compared with monetary policy. Fiscal stimulus has shorter time constant so it will take less time to see the effect in economic growth. China has growth goal of 7.5% this year and if it is not achievable, it would be too late for monetary policy to be helpful. Monetary policy typically takes 12 to 18 months to fully transmit to economic activities. Second, fiscal stimulus can be targeting to specific economic sector or economic zone etc. The impact of monetary policy is the overall economy and it is difficult to be narrowed to specific areas.

Looking ahead, China could ease a bit in monetary policies, but I do not expect much as it will further endanger the housing market and the credit market.

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