After a string of economic indicators suggesting China's first quarter growth may have slipped below the annual target of 7.5 percent, the government has decided to try to arrest the slowdown with a package of policies.
At a State Council meeting chaired by Premier Li Keqiang on Wednesday, a set of supportive policies, including cutting tax for micro and small businesses, facilitating shanty-town renovation and speeding up railway construction, was announced in an apparent attempt to stimulate growth.
"These measures show that the government aims to stabilize short-term growth with policies which can enhance efficiency while avoiding future financial troubles," said Lu Ting and Sylvia Sheng, economists with Bank of America Merrill Lynch, in a research note.
The stock market was unmoved by the modest stimulus package, with the benchmark Shanghai Stock Index down 0.74 percent on Thursday.
Among the measures released on Wednesday, China decided to let the China Development Bank, the largest policy bank in the country, set up a special organization to issue targeted housing financing bonds to other financial institutions in support of shanty-town reconstruction and other infrastructure projects.
The new financing approach, seen as a reform step, will help establish a long-term sustainable funding channel for much-needed infrastructure projects, said HSBC Chief China Economist Qu Hongbin.
It was announced at Wednesday's meeting that China will speed up railway construction in the central and western region to push forward urbanization and reduce regional inequality, with 6,600 km of new railway lines planned for 2014 nationwide.
The projects in shanty-down renovation and railways will jointly drive investments amounting to over one trillion yuan (162.6 billion U.S. dollars), according to analysts.
While hoping the investment boost will pump up the economy, the government is also looking to the vitality of small businesses to support growth and create enough jobs.
Tax breaks for small and micro firms will be extended till the end of 2016, according to the State Council. It is also considering raising the tax threshold significantly above the current level of 60,000 yuan.
China's small and micro-sized enterprises have played a leading role in generating jobs. Over 70 percent of new jobs are created by China's 11.7 million such operations, according to a recent report released by the State Administration for Industry and Commerce.
The State Council decision came as hopes for stimulus policies have been running high in China amid weak economic activities across the country that highlighted the challenges the government faces in its efforts to balance growth and reforms.
The latest evidence can be found in the manufacturing purchasing managers' index (PMI), a key measure of factory activity in China.The official PMI for March, compiled by the National Bureau of Statistics and the China Federation of Logistics and Purchasing, edged up 0.1 percentage points from February to 50.3. The reading, the first rise since November, is a touch above 50 -- the expansion/contraction watershed.
The HSBC/Markit PMI, which sampled small and medium-sized enterprises, dipped to an eight-month low of 48 in March, from a final reading of 48.5 in February. It also signals the sharpest fall in output since November 2011.
That, combined with other weak indicators ranging from industrial production, fixed asset investment to power consumption, all painted a murky picture of the economy.
Zhang Zhiwei, chief China economist with Japan's Nomura Securities, saw Wednesday's package measures as a signal for policy easing.
"These measures clearly show that the pace of policy easing is picking up," Zhang wrote in a research note, with a projection of 7.3-percent growth for the first three months.
Without a pick-up in policy easing, growth will likely drop below 7 percent in the second and third quarter, he added.
"We reiterate our view that both monetary and fiscal policies will be loosened in the second quarter. We expect a cut in banks' reserve requirement ratio by 50 basis points in the second quarter and another cut in the third," Zhang wrote.
But Lu and Sheng from the Bank of America Merrill Lynch maintained that the market is overly bearish on China.
China set the growth target for 2014 unchanged at around 7.5 percent to give more prominence to its reform agenda.
But at a press conference following the conclusion of the annual legislative session in March, Premier Li said there is a level of flexibility for the target, stressing rather the importance of creating enough jobs.
China is due to release GDP data for the first quarter on April 16.
Source: Xinhua
