‘Two sessions 2022’: with China’s debt and economic outlooks on tap for policy-setting meetings, analysts weigh in

  • Rebound in infrastructure investment growth seen filling ‘a small part of the gap left by slowing export growth, the large property sector contraction and the rising costs of China’s zero-Covid strategy’
  • As China’s poorer regions face growing economic pressure, deteriorating financial conditions may warrant more fiscal support from Beijing

Despite its slowing economic growth, China may not raise its fiscal deficit target significantly and is likely to refrain from excessive stimulus to prevent the further build-up of aggressive debt by local governments, according to analysts.

Premier Li Keqiang will deliver the government work report on Saturday during the annual “two sessions” gatherings of the National People’s Congress and the National Committee of the Chinese People’s Political Consultative Conference, which kick off on Friday in Beijing.

The report usually sums up the country’s economic and social development from the previous year and lays out general guidelines for government policies for the current year, including its fiscal spending targets.

Analysts widely believe that Beijing will seek to maintain the nation’s gross domestic product (GDP) growth of somewhere between 5 and 5.5 per cent this year, with policymakers having already made their intentions clear to focus on stability and financial risk reduction.

A careful balance of growth and debt management looks to top the agenda for Beijing in the coming months and will be highlighted in the work report, analysts said.

Iris Pang, chief economist for Greater China at ING, estimated that the fiscal deficit target would be set at 3.2 per cent of China’s GDP, with a “moderate” rise in the quota of local governments’ special-purpose bonds, which are funnelled into infrastructure spending.

In 2021, China trimmed back the central government’s fiscal deficit-to-GDP ratio target to 3.2 per cent from 3.6 per cent in 2020, signalling a shift from economic stimulus to a greater willingness to reduce debt.

Beijing also cut the full-year quota for local government bond sales only moderately last year, allowing them to sell 3.65 trillion yuan (US$578 billion) worth.

“The size of the fiscal deficit is a double-edged sword; if the deficit is too small, the market may be concerned that the economy lacks the necessary stimulus to drive growth, while too much spending could raise questions about the indebtedness of the government or local governments,” Pang said.

Year-on-year growth of the world’s second-largest economy was 4 per cent in the fourth quarter of 2021, slowing from 4.9 per cent in the previous three months, and bringing the full-year growth rate to 8.1 per cent.

Nomura expected a cut in this year’s fiscal deficit-to-GDP ratio target to 2.8 per cent from 3.2 per last year, citing higher-than-expected fiscal revenue and lower-than-expected expenditures from last year as the main reasons.

The Japanese bank also estimated a small rise in local governments’ special-purpose-bond quota to 3.75 trillion yuan this year, expecting that Beijing will count on infrastructure spending to help stabilise growth.

“We expect infrastructure investment growth to rebound to around 7 per cent in 2022 from last year’s 0.2 per cent. However, it would be unrealistic to expect much faster infrastructure investment growth, and its pace in the high single digits would only fill a small part of the gap left by slowing export growth, the large property sector contraction and the rising costs of China’s zero-Covid strategy,” Nomura said on Wednesday.

Finance Minister Liu Kun has said that China will unveil bigger tax and fee cuts this year, and the central government will step up payments to local governments to offset the hit to their revenues.

In particular, those regions that are facing growing pressure on their economy amid deteriorating financial conditions would need more fiscal support from Beijing, analysts said.

“Tax and fee cuts and employment should be the focus of fiscal work this year,” China Merchant Securities said last month. “The new tax- and fee-reduction policies in 2022 will strengthen support for small, medium and micro enterprises; individual industrial and commercial households; and manufacturing.”

“Under the economic downturn, due to resources and population outflow, the differences in economic development between regions may continue to widen, which will place higher requirements on central fiscal transfer payments.”

While China may not raise its fiscal deficit target or even cut the target, the central government still has a number of resources to finance its spending, including the central bank’s lending facilities, policy banks, central government-owned state firms, local government financing vehicles and local government special-purpose bonds.

Growing local government debt pressure, especially in weaker regions that mainly rely on land sales as their main source of revenue, has been a concern for Beijing.

Over the past year, the disparities in provincial growth across China have continued to widen. Economies in coastal regions have been surging ahead on the back of rising exports while northern and inland provinces have been lagging behind, largely due to their dependency on government investments and population outflows.

China’s local governments will have to pay off around US$1 trillion worth of bonds coming due in 2022 and 2023, S&P Global Ratings said in a report on Tuesday.
And weaker provinces and municipalities may be hard-pressed to repay maturing bonds, the US rating agency said.

But the central government “is ready to support” local governments if there’s a liquidity crunch, through policy banks and state-run lenders, by holding onto or buying their new debt, S&P Global Ratings said.

Author: Amanda Lee, SCMP

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