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Trade War

China stimulus signals trade war first, debt worry later

Pivot toward stabilizing economy raises concerns of future financial risk

Vehicles and pedestrians travel on a road in Changsha, the capital of China's Hunan province. The government will pour money into infrastructure projects.    © AP

BEIJING -- China's new economic measures announced on Monday -- to increase liquidity and offering nearly $200 billion to local governments so they can spend on infrastructure -- signals priorities shifting from slashing debt to weathering the trade war with the U.S.

The goal is to stave off defaults on risky debts and keep the economy stable. There are concerns, however, that shelving the government's effort to cut down on China's enormous debt load could spell financial risk down the road.

The government will roll out "targeted and well-timed regulations in the face of external uncertainties and keep the economy performing within a reasonable range," an executive meeting of the State Council, chaired by Premier Li Keqiang, declared on Monday. The ruling Communist Party will formally adopt the approach as its guiding economic policy for the second half of 2018 at a Politburo meeting to begin within the month.

The council called for a "prudent" monetary policy, a subtle shift from the previous "prudent and neutral" line. 

The People's Bank of China on Monday lent an all-time high of 502 billion yuan ($73.9 billion) to major banks through a medium-term lending facility. It has directed commercial banks to use the facility to invest in bonds graded AA+ or lower, according to media reports.

The central bank "has begun intervening directly in the bond market to stimulate the economy," said an economist at one brokerage.

China's crackdown on widespread off-the-books lending, known as shadow banking, caused corporate bond defaults in the first half of 2018 to swell 40% in value year on year. A number of businesses with low credit ratings have abandoned plans to float debts.

The State Council meeting also agreed to pursue a more proactive fiscal policy, with investing in railroads and other infrastructure seen as a likely angle. Infrastructure spending growth in January-June slowed to a 7% year-over-year rise from 2017's 19% climb, dragging on the economy overall.

The council said it would prod more tangible progress on current infrastructure projects by issuing 1.35 trillion yuan in special bonds for local governments.

The State Council voiced caution about resorting to strong stimulus policies. But "current demand for infrastructure investment is less intense than in the past" after having run "at a high level, with a growth rate of more than 20% being maintained for many years," in the words of a National Bureau of Statistics spokesman. Because the only targets left are regional projects where it is tough to turn a profit, there are concerns that a glut of unneeded infrastructure may arise.

Chinese regional governments and state-owned businesses have racked up heavy debt loads under economic policies laid down after the 2008 financial crisis. In 2017, China's debt was equivalent to more than 250% of its gross domestic product, according to the Bank for International Settlements. The Xi government has treated cutting financial risk as the top economic priority since the party congress in the fall of 2017.

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