Expert: Sensible to avoid 'following old path' of relying on infrastructure

Additional stimulus measures are needed to consolidate China's economic recovery following an interest rate cut on Tuesday, and such moves should be compatible with the country's high-quality development pursuit and avoid any worsening of the economic structure, experts said.

"The economy needs an appropriate amount of stimulus at this moment as growth momentum weakens. The more important question is how the stimulus is delivered," said Shao Yu, chief economist at Orient Securities.

It is sensible to avoid "following the old path" of mainly stimulating infrastructure investment and the property market, which can stabilize the economy over the short term but could have long-term side effects of impeding economic restructuring, said Shao, who is also an expert member of the monetary policy committee of the People's Bank of China, the nation's central bank.

Instead, policy support that will boost growth in both the near and long term should be stepped up, such as boosting spending on basic research, technology applications, vocational training, childbirth incentives and affordable housing for new urban arrivals, Shao said.

On Tuesday, China ramped up efforts to shore up economic recovery by reducing loan prime rates, the market-based lending benchmarks, for the first time since August.

The one-year LPR dropped by 10 basis points to 3.55 percent, while the over-five-year LPR, on which lenders base their mortgage rates, fell by the same amount to 4.2 percent, according to the PBOC.

The cuts will help cement the faltering housing market recovery, ease financing costs and debt burdens of the real economy, and boost investor sentiment in the capital market, said experts, who also highlighted the more important implication of the cuts being that it should be the start of a new round of policy support.

A State Council executive meeting on Friday mulled several policies to promote a sustained economic recovery, centered on improving macroeconomic policies, expanding effective demand, strengthening and optimizing the real economy and preventing and resolving risks in key fields.

By stressing expanding effective demand, China is likely to focus on satisfying new types of consumer demand and boosting new infrastructure, instead of driving up demand in low-efficiency sectors, said Pan Helin, co-director of the Digital Economy and Financial Innovation Research Center at Zhejiang University's International Business School.

China should take advantage of muted inflation and a low-interest rate environment to promote "leapfrog development" in economic restructuring, Pan said, and he called for targeted macroeconomic adjustments to boost technological innovation and emerging sectors.

"Policy should stay true to the country's strategic resolve," Pan said, adding that a deluge of strong stimulus measures should be avoided, which may bring the risk of economic overheating amid the US shift from monetary tightening to easing.

China has upheld the principle of keeping steadfast and unremitting in implementing strategies in its economic governance, as part of Xi Jinping Thought on Socialist Economy with Chinese Characteristics for a New Era.

Apart from accelerating economic upgrading, experts also called for greater efforts to ensure a soft landing of the housing market — a key source of financial risk and a laggard in the economy — with fixed-asset investment in real estate development falling 7.2 percent year-on-year in the January-March period.

Lu Ting, Nomura's chief China economist, said it is time to refocus on the property sector as new home sales further shrunk over the past week, adding that the central government may grant local governments bigger space to roll out additional easing measures in the property sector.

Tuesday's rate cut can save nearly 700 yuan ($97.55) in yearly payments for a new homebuyer who takes out a 30-year mortgage with a principal of 1 million yuan. While the fall in mortgage costs could help encourage home sales, experts said more could be done in this regard.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said the over-five-year LPR may further drop in the second half to tamp mortgage rates further down, perhaps triggered by a cut in the reserve requirement ratio.