China FinMin: No Stimulus Coming, Get Ready for Austerity

China's finance minister has put the kibosh on talk of tax cuts, loan relief and stimulative measures designed to save the economy from the coronavirus slowdown. The government isn't confident that its real estate and capital controls will hold, as this would be the first stimulus since the government's deleveraging effort kicked into high gear in October 2017.

ZH: Beijing Crashes The Party: Chinese Media Warns Austerity Is Coming After FinMin Says "Proactive Fiscal Policy" No Longer Feasible

There is just one problem: none of it is true based on what China's finance minister Liu Kin wrote today in Qiushi, the Communist Party of China’s flagship magazine.

First, a quick look at what the misleadingly titled Bloomberg article, which cited Liu, says, it is far from the blanket "vow" of unconditional fiscal stimulus that one would conclude based on just reading the headline, as just two paragraphs in we read that "the nation will further perfect and implement measures this year to reduce corporate taxes and cut unnecessary government expenses."

Global Times: China should get ready for belt-tightening following virus outbreak

While it is generally expected that fiscal stimulus and monetary easing will undoubtedly be the two main tools of central authorities for alleviating downward pressure on the economy and for maintaining macroeconomic stability, given the past experience and the financial risks currently facing China, a flood of spending programs seems no longer on the financial regulators' list of choices for stimulating the economy.

"China will face decreased fiscal revenues and increased expenditures for some time to come, and the fiscal operation will maintain a state of 'tight balance.', Chinese Finance Minister Liu Kun wrote in an article published on Qiushi, a magazine affiliated with the Communist Party of China Central Committee. In this situation, it won't be feasible to adopt a proactive fiscal policy by expanding the fiscal expenditure scale. I, and instead, policies and capital must be used in a more effective, precise and targeted way," Liu said. Chinese Finance Minister Liu Kun wrote in an article published on Qiushi, a magazine affiliated with the Communist Party of China Central Committee.

...However, it should be noted that fiscal space constraint is not the key reason for belt-tightening. Past experience with massive stimulus already showed that a flood of investments could lead to many consequences like high levels of local government debts, and to the detriment of high-quality economic growth.

This is an admission that China is out of "free lunch" policy space. Easing would risk inflating the housing bubble. It would risk a potentially large devaluation of the yuan.