China pledges support for faltering economy, analysts question impact of coronavirus pandemic

China has pledged tax and infrastructure spending cuts to support economic growth, as economists questioned a strong recovery in the world’s second-largest economy as long as lockdowns continue.

Beijing will increase annual tax cuts by more than 140 billion yuan ($21 billion) to 2.64 trillion yuan, offer tax rebates to more economic sectors, and defer social security payments worth 320 billion yuan until the end of the year, the state-run Xinhua News Agency reported. The State Council, China’s cabinet, was quoted as saying on Monday by the news agency.

Other measures include 150 billion yuan ($22.5 billion) in emergency loans for the troubled aviation sector, the issuance of 300 billion yuan ($45 billion) in bonds to fund railway construction, and investment in new projects in energy, transportation and water conservation.

“Currently, the downward pressure on the economy continues to increase, which is very difficult for many market entities,” the cabinet said, according to Xinhua.

China’s leaders have vowed to ramp up support for the faltering economy, even as they double down on a draconian “dynamic zero COVID” policy that has trapped millions in their homes, closed factories and thrown supply chains into disarray.

Karsten Holz, an expert on China economics at the Hong Kong University of Science and Technology, expressed doubt that the measures will stimulate the economy as long lockdowns continue.

“Tax cuts, rebates and deferred Social Security payments will have no effect on the economy unless the extra money is spent in the hands of the public — not possible in a lockdown — and the public willing to spend the money — less likely at times of uncertainty,” Holz told Al Jazeera. .

Holz added, referring to China’s official name, the People’s Republic of China.

Iris Pang, chief economist for Greater China at ING, said the stimulus was “not small” but its impact would depend on the severity of the restrictions going forward.

“It represents at least 3.76 percent of GDP in 2022,” Pang told Al Jazeera. “Whether that’s enough depends on how resilient the upcoming lockdowns will be.”

China has set an ambitious growth target of around 5.5 percent for 2022 [File: Thomas White/Reuters]

China’s retail sales and industrial production fell in April to their lowest levels since the early days of the epidemic, as strict epidemic restrictions brought major cities to a halt, including Shanghai and Beijing.

Beijing has set an ambitious target of 5.5 percent growth in 2022, which many economists believe is unrealistic given the growing number of lockdowns and the lack of a timetable for bypassing strict controls forever.

On top of the fiscal measures, China has also put in place looser monetary policy, last week lowering the benchmark benchmark rate for mortgages by 0.15 percentage point more than expected.

China’s fiscal stimulus may be less effective this time around than it was during the early days of the pandemic, said Gary Ng, chief economist at Natixis in Hong Kong.

In a way, China’s success story in 2020 depends not only on supportive fiscal stimulus, but also on more flexible restrictions on movement after the early containment of the virus. However, the world has changed and the virus has evolved into more transmissible variants,” Ng told Al Jazeera.

“So, if the strategy to eradicate the novel coronavirus is to survive, businesses and households will still find it difficult to invest and consume despite the great help of the Chinese government. Fiscal policies may not be as effective as before if the intermittent shutdown prevents normal economic activities” .

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