China signals more government support to stabilise economy, with a wary eye on debt ratio

  • Finance minister Liu Kun says Beijing must ‘shoulder the responsibility’ for steadying the economy, while setting an ‘appropriate deficit ratio’
  • China’s fiscal deficit ratio was lowered to 3.2 per cent last year, but some market analysts think it may have been even lower

China will expand government spending to offset economic pressures, but the deficit ratio needs to be set at an “appropriate” level, finance minister Liu Kun said on Friday.

Beijing must “shoulder the responsibility” for stabilising the economy, Liu wrote in an article for the Party-run People’s Daily.

“While setting an appropriate deficit ratio, we should also decide debt size scientifically and effectively prevent and resolve risks.”

The comments come as the world’s second largest economy faces a host of economic challenges, from sporadic coronavirus outbreaks to a property market slowdown and economic tensions with the United States.

China’s fiscal deficit ratio reached 3.6 per cent of gross domestic product (GDP) in 2020, when the country rushed to cushion the initial shock of the coronavirus pandemic.

It was adjusted down to 3.2 per cent last year, but may have actually been lower because bond issuance and other local financing lagged behind expectations.

The market has been divided over China’s deficit spending. Ping An Securities chief economist Zhong Zhengsheng estimated last month the deficit ratio could be flat at 3.2 per cent of GDP this year.

Everbright Securities, however, forecast that the ratio could be slashed to 3 per cent of GDP because about 1.3 trillion yuan (US$205 billion) can be transferred from fiscal reserves this year.

China’s central bank has already loosened its monetary stance after Beijing identified threefold pressures facing the economy – contraction of demand, supply shocks and weaker expectations – and prioritised economic stability.

It cut policy rates by 10 basis points in January, helping stimulate a record 3.98 trillion yuan in new bank lending last month.

To help spur investment and support the economy further, the finance ministry also offered local governments an early quota allocation of 1.46 trillion yuan for 2022 special-purpose bonds.

Liu said the special purpose bond quota – a widely watched measure of fiscal support – should be focused on keeping the government leverage ratio basically stable, while the proceeds need to support projects already under construction.

“The new downward pressure has constrained the growth of fiscal revenue, while the evolving pandemic situation also increased the uncertainties,” the finance minister said in the article.

China’s fiscal revenue rose by 10.7 per cent from a year earlier to 20.25 trillion yuan last year, while expenditure increased 0.3 per cent to 24.63 per cent. The government cut tax and fees by 1 trillion yuan over the same period.

Despite concerns over local debt and fiscal risks, some government advisers have argued for stronger fiscal support this year.

“The fiscal deficit is not a flood or a beast, but an important tool to smoothen economic cycles,” said Zhu He, deputy head of research at Beijing-based think tank the China Finance 40 Forum last week.

Government subsidies should be extended to support bond issuance and policy loans to ensure annual growth of more than 10 per cent for infrastructure investment, he said.

Beijing will announce its GDP growth target, deficit ratio and local special purpose bond issuance quota in the annual government work report early next month.

Author: Frank Tang, SCMP

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