BREAKINGVIEWS-China’s wait-and-see approach exposes policy limit

By Ka Sing Chan

HONG KONG, May 7 (Reuters Breakingviews) - China is biding its time ahead of planned trade talks with the United States. On Wednesday, the country's top three regulators announced a raft of new measures but held off on major spending. The reluctance partly stems from the government's limited room to expand its fiscal deficit too quickly.

In a rare joint meeting, the heads of the People’s Bank of China, the China Securities Regulatory Commission and the National Financial Regulatory Administration detailed steps to prop up the tariff-hit economy. Those included lowering bank reserve requirements to inject 1 trillion yuan ($138 billion) into the system, rate cuts and other monetary easing, as well as stock market support tools and other moves.

The gathering is reminiscent of the last time the trio convened in September, when they surprised markets with sweeping rate cuts and followed up with a 2 trillion yuan spending package. Based on that playbook, the Ministry of Finance may soon follow suit with fiscal stimulus.

Yet it's becoming clear that Beijing is more reluctant to quickly open up its fiscal taps this time around. For one, officials are still assessing the economic damage of Washington's 145% tariffs on Chinese goods. It's also unclear how the trade war may pan out. U.S. Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer will meet China's economic tsar He Lifeng in Switzerland this weekend; the two sides are expected to discuss reductions to the broader tariffs and eliminating duties on specific products, Reuters reported on Wednesday, citing sources.

Moreover, economic planners will probably stick to their budget deficit target of 4% of GDP this year – the highest on record – given the central government's weakening fiscal position. In the first quarter, tax revenue fell 3.5% year-on-year, partly due to tax breaks handed out to boost growth. And even if the country hits its "around 5%" economic growth target in 2025, aggregate fiscal revenues are still likely to decline, reckons research outfit Rhodium Group. Notably, global ratings agency Fitch downgraded China's sovereign credit rating last month, citing rapidly rising government debt and risks to public finances.

Against this backdrop, it looks prudent for Beijing to pace itself.

CONTEXT NEWS

The People’s Bank of China, the China Securities Regulatory Commission and the National Financial Regulatory Administration held a joint press conference in Beijing on May 7 to discuss policies to stabilise China’s financial market.

The Chinese central bank said on May 7 it will cut the rate on seven-day reverse repurchase agreements, its benchmark lending rate, by 10 basis points to 1.4%. The amount of cash that banks must hold as reserves, known as the reserve requirement ratio (RRR), will also be cut by 50 bps, bringing the average level to 6.2%.