With China taking a more active fiscal policy in second half of the year, long AUD/USD?
After PBOC loosen its monetary policy, China will ease its fiscal policy
China’s pledge to lower corporate taxes and encourage infrastructure projects amounts to a fiscal nudge to counter the slowdown in economic growth. It is neither a policy U-turn nor a relaxation of controls on local government spending. We believe this will provide some support to the Aussie dollar.
The State Council said today that China would take a more active fiscal policy posture and pledged to accelerate local governments’ special bond issuance for infrastructure projects. Chinese stocks rallied higher on Monday on speculation of a large-scale policy easing. It is not a policy shift or broad-based easing but an expected fine-tuning. The State Council has set tone for avoiding measures that might over-stimulate China’s still-expanding economy. The policies will also seek to guide financial institutions to ensure reasonable funding for local government financing vehicles.
The policy comes at a time where slowing infrastructure spending has dragged down the growth of fixed-asset investment, a key driver of the nation’s economy. The fine-tuning is intended to bolster infrastructure investment during the period where China tighten controls on local government borrowing which has slowed the government-driven sector. China’s infrastructure investment growth slowed to 7.3% in the first half of the year, 11.7% lower than in a similar period a year ago. Several planned investment projects in Xinjiang and Hunan province were suspended this year, while infrastructure investment plunged in many regions since last year. Delayed projects that are short of funding will also increase social risks, as China’s policymakers remain committed to a multi-year campaign to curb debt growth. The financing support targets only existing local investment projects.
While the cabinet's statement on Monday did not mention deleveraging, that policy direction remains unchanged. The latest moves are intended to fine-tune previous tightening policies. The government will deliver a tax cut of 65 billion yuan by expanding a preferential policy for small tech enterprises to all companies on top of a promised reduction in taxes and fees for businesses this year worth 1.1 trillion yuan. The Ministry of Finance aims to approve a special bond issues totalling 1.35 trillion yuan this year, a 69% increase over last year’s 800 billion yuan, according to Monday’s meeting.
Our Picks
EUR/USD – Slightly bullish.
This pair may rise towards 1.1690 this week as BOE to raise interest rates may give euro some boost.
AUD/USD – Slightly bullish.
We expect this pair to rise towards 0.7455 this week amid further stimulus in China.
XAU/USD (Gold) – Slightly bullish.
We expect price to rise towards 1228 this week.
Fullerton Markets Research Team
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