China unveils $500 billion stimulus for the economy as it scraps growth target due to the pandemic

Hong Kong(CNN Business) China promised Friday to throw 3.6 trillion yuan ($500 billion) at its economy this year in extra stimulus measures as part of a bid to create 9 millions jobs and blunt the fallout from the coronavirus pandemic.

Chinese Premier Li Keqiang said China would not be able to set a target for growth in the world's second biggest economy for 2020 because of the "great uncertainty" caused by Covid-19 and "the world economic and trade environment."

But he pledged a much more aggressive fiscal response to the crisis, funded by a big increase in government borrowing.

This is the first time in decades that China has not set a growth target for its economy. Last year, Beijing targeted growth in the range of 6% to 6.5%. GDP grew 6.1%, its slowest pace in nearly 30 years.

The coronavirus pandemic and a weeks-long shut down throughout much of China dealt a historic blow to the country's economy. GDP shrank 6.8% in the first quarter, the first contraction that Beijing has reported since 1976.

Tax cuts, infrastructure projects

In response to the economic turmoil, Li set out a series of measures at this year's annual meeting of the National People's Congress, the country's rubber-stamp parliament.

The financial response will be significant for China. The government anticipates spending an extra 1 trillion yuan ($140 billion) this year so it can fund stimulus efforts, including tax cuts, rent reductions and other moves that could help create jobs and helping the poor.

That is likely to increase China's budget deficit to 3.6% of GDP this year. It's the first time the budget deficit target has been set above 3% since the country's current fiscal system was established in 1994. Last year's deficit was 2.8%.

The government will also issue 1 trillion yuan ($140 billion) worth of special treasury bonds, which Li said could be used to fund medical equipment and technology used for fighting the virus. And local governments will be allowed to issue up to 3.75 trillion yuan ($527 billion) in special bonds, which will help them to build 5G networks, railways, airports and other infrastructure projects. That represents an increase of about 1.6 trillion yuan ($225 billion) compared to last year.

All told, the scale of additional fiscal policy this year to support China's economy amounts to just above 4% of GDP, according to economists at Capital Economics — making it similar in scale to the country's response to the global financial crisis of 2008 and 2009. That percentage implies a value of roughly 4 trillion yuan ($560 billion) based on last year's GDP.

"Despite embracing relatively forceful stimulus, the leadership appear to be under no illusions that getting the economy back on track will be a challenging and drawn out process," the Capital Economics economists wrote in a Friday research note.

As part of its goals for 2020, Beijing wants to create nine million new urban jobs to help bolster employment in the country, according to Li.

Employment has long been a top priority for the government, but this year it is even more of one: Tens of millions of people were forced out of work by the pandemic, and analysts suspect the unemployment problem is much larger than Beijing's official data suggests.

"The employment targets suggest that they anticipate an extended period of labor market weakness," wrote Julian Evans-Pritchard, senior China economist for Capital Economics.

US-China tensions

Friday's political gathering also came as tensions between the United States and China flare up again, raising the possibility that the two could resurrect their trade war.

Li said that China still wants "phase one" of the trade deal, which the two countries reached in January, to continue. That agreement reduced some of the tariffs each side had placed on the other, while allowing Beijing to avoid additional taxes on almost $160 billion worth of goods. China also committed to buying an additional $200 billion of US goods and services this year and next.

Li added that China must stay committed "opening our door wider to the world, keep our industrial and supply chains stable, and make opening up a catalyst for reform and development."

The remarks from Li are "an attempt to calm trade fear at home," said Stephen Innes, chief global markets strategist for AxiCorp.

Analysts from Beijing-based China Renaissance said the phase one deal will be "a key barometer" for US-China relations, especially as tensions escalate.