China's policymakers will likely deploy a stronger mix of fiscal and monetary policy measures to shore up domestic demand and cushion the impact of the volatile United States trade policy, economists said on Thursday, as recent indicators point to pressures from weak external demand.

Key areas of focus, they said, should include spurring consumption, accelerating infrastructure investment and stabilizing the property market, with potential moves such as raising the fiscal deficit ratio with more fiscal spending, additional issuance of ultra-long-term special treasury bonds and providing targeted support for struggling enterprises.

Their comments came as data from the National Bureau of Statistics showed on Wednesday that China's official purchasing managers index for the manufacturing sector dipped from 50.5 in March to 49 in April, below the 50 mark that separates expansion from contraction.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said the reading was dragged down by the unwarranted tariff policy of the US and a seasonal lull following a busy March.

"With exports to the US likely to fall significantly in the short term, domestic demand will increasingly become the main support for the manufacturing recovery," he said. "We expect China's manufacturing PMI to remain in contraction territory in May but possibly rebound to around 49.5 as pro-growth policies kick in."

Wang also flagged the rising likelihood of monetary easing. "Based on past trends, if the PMI remains in contraction for two consecutive months, the probability of a policy rate cut increases significantly. Given the current external environment, property woes and price trends, the second quarter is ripe for cuts in both the reserve requirement ratio and interest rates."

Lu Ting, chief China economist at Nomura, said more work was needed to stabilize the economy. "To cope with these unprecedented challenges, China needs to take bolder moves to clean up the mess in the property sector, support consumption in a more sustainable way by reforming the pension system and fix the fiscal system to better protect business owners," Lu said.

Despite mounting pressures, the NBS data showed that the gauge for manufacturers' expectations for production and operation stood at 52.1 in April, suggesting strong optimism and confidence.

Chen Han, general manager of Shantou Qilong Toys Co, an export-oriented toy manufacturing enterprise based in Guangdong province, expressed confidence in the prospects of the Chinese economy and toy manufacturing industry, saying the rapidly evolving artificial intelligence will significantly bolster technological innovation, product iteration and industrial upgrading in the homegrown toy sector. "We will design more customized products in accordance with the preference of local consumers," he added.

The toy maker is expanding sales channels to reach more domestic consumers by leveraging e-commerce platforms such as Alibaba's business-to-business online trading site 1688.

Chen noted that his company's production was relatively stable in March, but the number of orders in April declined. He expects more supportive measures for small and medium-sized enterprises engaged in foreign trade, including fiscal assistance, tax and fee reductions to ease their burdens.

Wang Qing, an associate researcher at the Chinese Academy of Social Sciences' Institute of Finance and Banking, said it is advisable for policymakers to "fully leverage more proactive fiscal policies", suggesting an additional issuance of 2 trillion yuan ($275 billion) to 3 trillion yuan in special treasury bonds this year.

To boost consumption, he proposed both short-term and medium- to long-term moves, including issuing consumption vouchers, supporting private enterprise development, optimizing income distribution and using State-owned asset returns to support consumer spending. "Efforts should also be made to stabilize the property, stock and foreign exchange markets, and provide targeted support for foreign trade enterprises," Wang said.

A recent report from DBS Bank showed that although China faces challenges including property distress and great power rivalry, there is the wherewithal to deal with them, ranging from a generally high level of trust toward institutions to sufficient financial buffers.

Ji Mo, chief China economist at DBS Bank (Hong Kong), said: "When the tariff policy becomes clearer — especially toward the end of the second quarter — the Chinese government is expected to roll out a series of measures that will go beyond monetary policy, with a particular focus on fiscal policy and targeted support for specific industries."

"If the economy experiences significant downward pressure, we may once again see strong policy backing for traditional pillar sectors such as real estate and infrastructure, particularly in the latter half of the year, around the end of the third quarter or the beginning of the fourth," she added. "The government's resolve to keep the annual GDP growth rate around 5 percent is very strong."

Liu Zhihua contributed to this story.

Contact the writers at [email protected]

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