Experts stress H2 policy fine-tuning

Self-determined monetary measures and more proactive steps on the fiscal front can help further fine-tune China's economic policy in the second half of the year, experts said on Monday.

Such fine-tuning will support the real economy and improve resilience of the economic recovery from the effects of the COVID-19 pandemic, they said.

Their comments followed Friday's meeting of the Political Bureau of the Communist Party of China Central Committee, which set the nation's policy direction for the rest of this year.

The meeting indicated the nation will adopt consistent, stable and sustainable macro policies, and fine-tune them continually to prevent risks.

The top leadership highlighted that prudent monetary policy should keep liquidity at a reasonable and ample level. They stressed enhancing independence of macro policies and keep the renminbi's exchange rate stable at a reasonable and balanced level.

China's exchange rate policy, as well as other monetary measures, will remain stable even with external challenges, especially when the United States is expected to taper its quantitative easing, said analysts.

Making self-directed policies should be the key to sustaining domestic financial stability, according to a China International Capital Corp research team led by Peng Wensheng, chief economist.

In addition, the monetary policy will be more targeted, focusing on supporting small and medium-sized companies and stressed industries, to sustain recovery in the second half, the CICC economists said.

Maintaining sufficient flexibility of the RMB exchange rate is "the best measure" to deal with the mismatch of economic cycles between China and the United States and maintain the independence of domestic policies, said Zhang Bin, a senior researcher with the China Finance 40 Forum, or CF40, a financial think tank.

Any changes in the US economy will likely have an impact on China's economy, but the choice and use of macro policies in China should be based on the domestic economic situation. A flexible RMB exchange rate could absorb most of the external shocks, Zhang said.

The People's Bank of China, the central bank, also held a meeting on Friday that finalized its second half's work plan. It reiterated that maintaining policy "stability" will still be the priority.

Even though the authorities stressed on a "prudent" monetary policy, there is a high chance the central bank will cut the reserve requirement ratio again in the fourth quarter, having cut it in July, said Iris Pang, ING Bank's chief economist in China.

Policymakers did mention fiscal policy needs to become more expansionary, according to the meeting of the Political Bureau of the CPC Central Committee, but the timing of fiscal spending is scheduled to be around the end of this year and the beginning of next year, said Zhang Zhiwei, chief economist of Pinpoint Asset Management.

Zhang said stronger fiscal support is intended to boost growth in 2022, although the fiscal policy may not turn much expansionary in the third quarter.

Some analysts, however, expect the new issuance of local government special bonds may accelerate in the third quarter, to boost growth of fixed-asset investment in infrastructure, according to Fitch Ratings, an international ratings firm.