More proactive policy on the way

Investments will mainly be in transport, oil and gas, and telecom industries

More proactive fiscal policy, coordinated with moderate monetary easing, will initialize economic stimulus in targeted key areas in China, as investment is seen as an engine to drive growth versus external headwinds, said economists.

"Proactive fiscal policies to be more proactive" is the "loud and clear" message delivered by the authorities at the moment, economists said, as they look toward the upcoming policy fine-turnings but not a deluge of strong stimulus, especially through further tax cuts and greater fiscal spending.

Some specific measures were listed by the State Council after a meeting on Monday, including additional corporate tax deductions on research and development spending to a value of 65 billion yuan ($9.5 billion) and the acceleration of local governments' special bond issuance to support infrastructure construction.

The investment projects, which welcome private equity participation, will mainly be in the transport, oil and gas, and telecommunications sectors, according to the meeting's statement.

Local governments were required to guide financial institutions to meet "reasonable financing needs" of local government funding vehicles, a financing platform usually composed of State-owned enterprises, to ensure sufficient funds to complete those projects.

"These measures are significant, as they signal a more proactive approach by the authorities to support the economy, which is facing headwinds to growth from a domestic clampdown on financing and trade-restrictive measures externally," said Gene Fang, associate managing director, Sovereign Risk Group at Moody's, the international ratings agency.

That will lead to faster fiscal spending, less fiscal deposits and higher fiscal deficit in the second half of this year, according to Lu Ting, chief economist in China with Nomura Securities. The central government has targeted the annual fiscal deficit at 2.6 percent of GDP.

"More proactive fiscal policy, however, should not lead to another huge buildup of local government debt, especially from illegal fundraising measures, as that will result in further deterioration in the country's debt situation," said Qiao Baoyun, head of the academy of public finance and public policy under the Central University of Finance and Economics.

To speed up the issuance of 1.35 trillion yuan in special bonds, local governments could stimulate investment in land banks, toll-roads and shanty town renovation in the coming months, according to economists.

Data from the Ministry of Finance showed that in the first six months, the total issuance of special bonds was 367.3 billion yuan, or only 27.2 percent of the targeted amount.

In terms of monetary policy, the central bank has moderately eased liquidity and regulatory conditions recently, reflected by an injection of 502 billion yuan into the financial system, and an easing of restrictions on wealth management products.

Short-term positive impacts on the economy and markets could be seen in the next couple of months, said Nomura economist Lu, who expects infrastructure fixed asset investment growth to recover, and both stock and bond markets may benefit from the stimulus.