China discovers how to give the economy a fillip without toppling it

Fiscal and monetary measures should be deployed to give the economy a fillip when it’s most needed. The scope of tax cuts detailed over the weekend is a great first step: They boost consumers, who are now the dominant growth driver. The tax cuts might also, in the process, shore up Chinese demand for trade with the rest of Asia.

Until now, policy seemed frozen in Beijing and hamstrung by competing goals. Choices are still constrained relative to past episodes of slackening economic life, but thankfully something is giving. The bigger-than-anticipated tax changes are most likely the start of a series of reductions for 2019, according to Deutsche Bank AG.

It’s also not hard to foresee some more aggressive monetary easing. Together with an array of comments from top officials aimed at reassuring investors, the steps are welcome.  

A more pronounced tilt toward stimulus can also help shore up faltering growth in the rest of Asia. In so doing, China can take a more overt leadership role in the region. Its economy is bigger than during past periods of emerging-market tumult. China aspires to be recognized for leadership in Asia. 

The tension for the nation’s leaders right now runs along these lines: Stimulus is warranted to help combat a slowing expansion and meet the year’s growth target of about 6.5 per cent. Stimulus also has to be reconciled with a goal of checking debt; the public spending binge to fight the Great Recession led to a borrowing surge that lenders still struggle with.

The central bank has cut bank reserve requirements a few times, but hasn’t brought itself to undertake something more substantive.

One option might be to let the economy find a floor, even if that means an expansion of closer to 6 percent. But failure to reach the growth target might look weak in the face of President Donald Trump’s taunts that tariffs have China on the run. A more benign international environment might have made Beijing more relaxed about letting business cycles ebb and flow.

The tax cut, flagged earlier in the year and fleshed out in recent days, puts money in the hands of consumers, especially in urban areas.

This is where China’s fortunes increasingly rise and fall. Infrastructure booms, like the one induced in 2008-2009, no longer pack the same punch, but raise concern among buyers of Chinese debt. And unlike then, consumers now account for the bulk of gross domestic product.

The past few days have seen a shift in how China is approaching this slowdown, both in word and deed. On Friday, top financial officials were out in force talking up stability, which in this context means not letting markets or the economy collapse. Also on the weekend, President Xi Jinping vowed “unwavering” support for nonstate firms.  
 

So what’s next? China’s currency, the yuan, may be allowed to slip after hovering around 7 per dollar. In theory, this would allow, or reflect, a more pronounced easing of monetary policy. (The currency is carefully managed by the central bank.) 

During the Asian financial crisis of the 1990s, China did its part by not depreciating the yuan, which would have set off a new and catastrophic wave of currency weakening in the region. In the Great Recession, Beijing released a torrent of infrastructure spending – and the country’s financial system is still paying the price.

This time, China is trying to be more judicious. This time, the risk isn’t that Beijing goes wild with stimulus, but that leaders are too timid.