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Analysis-China struggles for options as COVID threatens economic goals -Breaking

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© Reuters. FILE PHOTO – Commuters in face masks after the outbreak of coronavirus (COVID-19), stand in a bus early in the morning near a checkpoint in Hebei, China, April 13, 2022. Picture taken April 13, 2022. REUTERS/Tings

Kevin Yao

BEIJING, (Reuters) – China’s policymakers struggle to manage an economic slowdown which could lead to job loss in a politically sensitive years. COVID-19 lockdowns have disrupted supply chains and jolted businesses.

According to policy insiders, Beijing will continue with a target for economic growth of 5.5% in the coming year. Beijing also plans to create over 11 million urban jobs.

However, it is likely that the goal of achieving this goal will be more difficult if China relaxes its zero-COVID policies, something which China has been showing little signs of doing.

For 2022 stability is essential, and a two-a-decade meeting with the ruling Communist Party will be held in autumn to consolidate President Xi Jinping’s leadership for a record-breaking third term.

“We have to increase support policy for the economy to counter the COVID impact,” Xu Hongcai said to Reuters. He is the deputy director of China Association of Policy Science’s economic policy commission.

China has had its most severe outbreaks of coronavirus since 2001, despite China’s efforts to contain domestic cases. Major cities have been placed under lockdown and questions raised about China’s ability to sustain its zero-COVID policy.

Societe Generale (OTC) has estimated that 80% of GDP (gross domestic product) is accounted for by provinces with significant restrictions on mobility.

Investors are eager to get information on the Politburo’s policy, which is a key decision-making body within the Communist Party.

Inflation and fears of capital outflows may limit the ability to provide monetary assistance. Federal Reserve aggressive policy tightening could be seen as luring money back into higher yielding assets in the United States.

Tuesday’s top-level meeting was chaired by Xi. It announced a major infrastructure push to increase demand. This reinforces Beijing’s preference to invest in big-ticket projects that will spur economic growth.

China used 4 trillion yuan (605.82 billion dollars) as a buffer against the financial crisis. This created a mountain in debt.

China’s efforts to improve infrastructure for 5G and artificial intelligence has resulted in lower returns on projects such as railways, highways and airports.

Beijing pledges to provide additional stimulus beyond such stimuli.

China has established a 2.8% annual deficit goal for its economy for 2022. It also set aside 3.65 trillion yuan annually for special local bonds that will be used to invest in infrastructure.

Zhang Ming (senior economist, Chinese Academy of Social Sciences), a leading government think-tank said Monday in a report that the government should set a higher deficit goal of 3.0-3.2% GDP, and issue large-scale special Treasury bonds to help small companies and fund important projects.

This would need to be approved by parliament and could only occur if there is a drastic change in the outlook, according to policy insiders.

There is increasing pressure to help jobs. The official unemployment rate reached 5.8% in February, which was a record high for the country.

A government advisor spoke under anonymity to say that “we cannot exclude the possibility of the government increasing financial and fiscal measures in the event the COVID situation gets worsened and economic pressure intensifies.”

Wang Yiming is a central bank adviser and said this week at a forum that the government needed to increase its policy support in order to see growth return to above 5% during the second quarter.

Analysts believe that current targets are too optimistic.

Nomura’s chief China economist, Ting Lu has lowered his second quarter growth projection to 1.8% from 3.4%. This is in contrast with the previous quarter’s 4.8%. He cited more lockdowns and severe logistic disruptions as well as no changes in COVID policies. From 4.3%, his full-year forecast for growth has been lowered to 3.9%.

SUPPLY SHOCK

Beijing, and other authorities around the world are opting for targeted and fast lockdowns as well as rapid detection of infection to try and avoid a shutdown that would affect entire cities.

These restrictions would exacerbate production bottlenecks in the country and hurt investor and customer confidence.

Lu stated in a client letter that “this supply shock could further weaken demand to homes, durable goods, and capital goods because of falling income and rising uncertainties.”

Last week, the International Monetary Fund cut China’s 2022 growth projection to 4.4% citing widespread COVID-19 disruptions and lockdowns.

Markets were surprised by the People’s Bank of China’s (PBOC) decision to reduce banks’ reserve requirements ratio (RRR), by 25 basis points, this month. However, it maintained its benchmark lending rate.

Nomura’s Lu believes that the central bank will reduce the RRR another 25 basis points prior to mid-2022, and 10 basis-point cuts on major rate policy rates before relaxing financing restrictions for local governments.

“These policies can provide some relief, but real growth bottlenecks are still present,” he stated.

($1 = 6.6026 )

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