How China Could Mitigate a Trade Shock Through Fiscal Policy

China’s fiscal policymakers confront challenges from US tariffs, prioritizing the stimulation of domestic demand while safeguarding fiscal stability. Their strategies encompass proactive fiscal policies, strengthening the social safety net, and providing support for local government budgets.

Addressing Trade Turbulence

China’s fiscal policymakers are challenged by escalating trade tensions with the US, necessitating strategies to boost domestic demand while ensuring fiscal prudence. The imposition of tariffs has introduced economic uncertainty, likely hindering a return to pre-tariff trade levels soon. This situation impacts global demand and poses risks to China’s growth, dampening business and consumer recovery efforts. Amid this uncertainty, proactive fiscal strategies like increased government deficits and expanded financing are crucial. However, ongoing flexible responses underpinned by structural reforms are required to sustain growth and maintain fiscal stability.

Strengthening Domestic Support

Enhancing domestic demand is critical, focusing on high-impact public spending. Expanding social spending, subsidies to key sectors, and commitment to “three guarantees” are essential. Digital consumption vouchers, though implemented to boost spending, have faced challenges. Future schemes need better design, clear rules, and better oversight. Tax relief for affected manufacturers can ease financial stress but should remain temporary to preserve fiscal health. Timely rebates and grants can further support employment and growth, ensuring measures are effective and sustainable.

Enhancing Fiscal Coordination

Local governments, responsible for significant expenditures, face fiscal constraints due to revenue mismatches and debt issues. The central government is pivotal, having issued special bonds for fiscal transfers. Improving the speed and focus of disbursements to vulnerable sectors is critical. Coordination between central and local governments is necessary to respond effectively to tariffs’ effects. Ongoing intervention should balance support with fiscal discipline. Moreover, deeper institutional reforms are needed for long-term fiscal sustainability, ensuring transparency and a robust foundation for growth.

Source: How China Could Cushion a Trade Shock With Fiscal Policy