With a swath of tax breaks and hints at more loans for small businesses, Chinese state planners this week started to respond to a problem already felt by many consumers and investors: the country’s economic recovery is in trouble.

After months of disappointing data, economists and traders expect China’s government on Thursday to cut the headline policy interest rate for the first time in almost a year.

Such a step has been heralded by a stream of recent easing measures. Policymakers on Tuesday trimmed a short-term bank lending rate to boost financial sector liquidity, while last week the six largest banks slashed deposit rates.

But many economists believe stronger action will be needed to reinvigorate the world’s second-biggest economy, weighed down by a lingering property slowdown, weaker trade, record youth unemployment and a dearth of optimism at a time when many hoped it would rebound.

“It’s not enough,” said Ting Lu, chief China economist at Nomura, of the expected rate cut. “The real reason for the weak growth now is not about high interest rates. It’s more about confidence about the future.”

Six months after authorities abandoned the zero-Covid regime that cut the country off from the rest of the world, China’s economy remains a global outlier. Beijing did not apply the kind of fiscal or monetary stimulus employed by other economies during the pandemic. While many policymakers elsewhere are now fighting to curb inflation, China’s prices are stagnant.

The country’s reopening, anticipated as a boost to the global economy, has failed even to revive animal spirits at home.

“We thought that after the opening of the Covid situation, things would get much better, and now it’s not turning out that way,” said Zhu Tian, professor of economics at China Europe International Business School in Shanghai. “Whatever happened during the past three years clearly has lowered people’s mood.”

China’s stimulus predicament dates to the early stages of the pandemic. In mid-2020, as with other major economies, China experienced a boom in house and stock prices, prompting bubble warnings from top regulators. Policymakers moved to deleverage the heavily indebted property market, trigging a sector-wide crisis and driving developers into default. Construction activity ground to a halt.

In contrast to policies in the US and Europe designed to directly support households and businesses, Beijing spent heavily building a vast anti-Covid apparatus, mandating mass testing and imposing citywide lockdowns that stifled growth.

Data on Thursday will provide further indications of the prospects for meeting Beijing’s already modest goal this year of 5 per cent economic growth, the lowest target in decades. The property market, which since 2021 has been mired in a prolonged slump, has yet to recover, with new home sales in 30 major cities this quarter running at only 75 per cent of the 2019 level, according to Macquarie.

In early 2020, the People’s Bank of China cut the headline medium-term lending facility (MLF) rate from 3.3 per cent to 2.95 per cent but since then has lowered the rate only slightly further to 2.75 per cent. The central bank is projected on Thursday reduce the rate by just 10 basis points, according to market participants, the same amount by which it pared the reverse repo rate this week.

Expectations of a rate cut have been mounting in closely watched official statements. A reference this month by Yi Gang, governor of the People’s Bank of China, to “strengthening countercyclical adjustment” indicates a move towards easing, according to Larry Hu, chief China economist at Macquarie. “Another policy turning point is imminent,” Hu wrote in a report.

Economists largely agree that any dramatic change in monetary policy is unlikely. In a recent private meeting, officials including PBoC deputy governor Liu Guoqiang argued against relying on monetary stimulus alone, according to one person present. 

Low inflation gives the PBoC “room to act if needed”, said Erin Xin at HSBC, but she did not expect “large-scale stimulus”. Zhu at China Europe International Business School noted the government was limited by downward pressure on the exchange rate.

Analysts expect an MLF rate cut to be accompanied by non-monetary measures. Hu at Macquarie forecast a co-ordinated relaxation of restrictions on property purchases, infrastructure spending and bank lending.

Chetan Ahya, Morgan Stanley chief Asia economist, anticipated a Rmb1tn ($140bn) infrastructure package and tax subsidies for consumers. “Taken together, we think that you should see a recovery broadening out with this policy support in the second half,” he told a media briefing on Tuesday.

The spectre of inflation is still a deterrent from more forceful action. “Western economies have gone too far in directly subsidising enterprises and distributing money to families — they are paying the price of inflation,” said Guan Tao, chief economist at Bank of China International and a former director at the State Administration of Foreign Exchange. “But we are a bit too conservative.” 

On the ground, there are also mixed signals. In Shanghai’s Pudong District, financial workers on their lunch break crowd into luxury goods shops. But in a nearby mall, retail spaces are boarded up, and shops that are open are quiet. “It’s not recovered from last year,” said one shop assistant at Toys R Us, blaming a lack of tourists.

One economic researcher at a mutual fund in Shanghai cited recent consumption support in sectors such as cars but did not expect more radical measures such as the cash handouts disbursed in Hong Kong to spur spending.

Amid this week’s anticipation of easing, few observers expect a sudden departure from the cautious approach of China’s Covid era. But some believe that is now what is needed.

“It has to be something quite different,” said Zhu. “What China needs is a positive shock, one that will change the mood of the whole business community.”

Additional reporting by Wang Xueqiao in Shanghai and Andy Lin and Hudson Lockett in Hong Kong

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