Haunted by 2008, China goes smaller on stimulus

Overreach in previous recovery leads to split with U.S. in approach.

The U.S. and China are pursuing divergent economic policies in the aftermath of the coronavirus recession, in a role reversal from last time the world economy was recovering from a shock.

One of the takeaways from the annual National People’s Congress underway in Beijing is a conservative growth goal, with a tighter fiscal-deficit target and restrained monetary settings. That’s a big contrast with Washington, where President Joe Biden is preparing a second major fiscal package after he gets final approval for his $1.9 trillion stimulus.

The widening policy divergence is putting strains on exchange rates and could potentially reshape global capital flows. It stems, in part, from different policy lessons from the 200709 crisis.

A stunted and choppy U.S. recovery left key Democrats concluding it’s vital to “go big” on stimulus and keep it flowing. For monetary policy the moral was: “Don’t hold back” and “don’t stop until the job is done,” Federal Reserve Chair Jerome Powell said last week.

China’s leaders have a different take. A massive unleashing of credit growth back then led to unused infrastructure, ghost towns, excess industrial capacity and an overhang of debt. While rapid containment of the pandemic meant the economy didn’t need as much help in 2020, President Xi Jinping and his team are now winding things back to refocus on longer-term initiatives to strengthen the technology sector and tamp down debt risks.

“Each learned a lesson from the previous episode, and so it is kind of a swap of positions,” said Nathan Sheets, head of global economic research at PGIM Fixed Income and a former U.S. Treasury undersecretary for international affairs.

One of China’s financial regulators, Guo Shuqing, highlighted in a briefing just days before the opening of the annual legislative

gathering that high leverage within the financial system must continue to be addressed. Guo pointed to worries about inflated property prices and the risk of overseas money pouring in to take advantage of the premiums China’s assets offer. He also indicated the nation’s lending rates will likely go up this year.

In three appearances in the past two weeks, Powell has made clear the Fed is going to keep policy rates near zero until well into the economic recovery, when most jobless Americans are brought back into employment. He also gave no indication asset purchases will be tapered as Biden’s fiscal stimulus kicks in in coming months.

China’s reluctance toward the kind of “go big” message of Treasury Secretary Janet Yellen dates many years. After unleashing a fiscal package of $586 billion at the time (4 trillion yuan) and an unprecedented surge in broader credit after the 2008 crisis, Beijing by 2012 was saying it wouldn’t do that again.

Reticence toward acrossthe-board stimulus later turned into a concerted push to rein in leverage. A May 2016 front-page treatise in the People’s Daily — the Communist Party’s mouthpiece — blasted excessive debt as the “original sin” sowing risks across financial and real-estate markets. The anonymous article — widely said to have been written by Vice Premier Liu He, Xi’s top economic adviser — called stimulating the economy through easy monetary policy

A May 2016 front-page treatise in the People’s Daily — the Communist Party’s mouthpiece — blasted excessive debt as the ‘original sin’ sowing risks across financial and real-estate markets.

a “fantasy.” So after the country’s success in applying draconian restrictions to contain the coronavirus, Beijing is returning toward its pre-pandemic focus on building domestic tech capabilities and managing down debt risks.

After ditching an annual growth target for 2020 given the turmoil caused by COVID19, China’s leadership set a goal of a GDP increase of more than 6% this year — conservative since it’s well below economists’ projections for this year’s expansion.

In the meantime, surging American GDP gains are set to lift China’s prospects as well. Exports to the U.S. soared more than 87% in the first two months of this year compared with the pandemic-hit period a year before, faster than China’s overall rise of just under 61%.

“The U.S. locomotive is back on track,” said Catherine Mann, global chief economist at Citigroup Inc.

ASSOCIATED PRESS 2019 The future of U.s.-chinese relations is facing another twist with the widening policy divergence putting strains on exchange rates and potentially reshaping global capital flows.

ASSOCIATED PRESS 2017 Janet Yellen, former chair of the Federal Reserve and now Treasury secretary, is among the advocates of the plan to “go big” with a stimulus, but China, stung by the 2008 aftermath, is moving more cautiously.