MNI ANALYSIS: Lower Deficit Ratio Won't Hurt China Economy

     BEIJING (MNI) - China's lowered deficit to GDP target for 2018, although

unexpected, does not suggest much weakened fiscal support in 2018 and will not

add much downward pressure to investments and GDP growth.

     The deficit ratio for 2018 was lowered to 2.6% from 3% last year, raising

concerns it will drag GDP growth lower, largely in 2018. In absolute terms,

however, the deficit is unchanged from 2017 at CNY2.38 trillion.

     Higher special project bond issuance, used to finance specific projects,

will pick up considerably in 2018 to fill in the hole the lower deficit ratio

leaves. Total SPB issuance will be capped at CNY1.35 trillion in 2018, well

above the CNY800 billion in 2017.

     Added together with the 2.6% deficit figure, a broader deficit ratio will

be closer 4.1% of GDP in 2018, higher even than the 3.8% seen in 2017.

     Outstanding SPBs amounted to CNY6.14 trillion through December 2017, lower

than the quota of CNY7.27 trillion, indicating an additional CNY1.13 trillion

SPBs can be issued, on top of the CNY1.35 trillion quota, according to data from

Ministry of Finance. This will create greater leeway for local government bond

issuance to help support investment.

     --SPB ISSUANCE IMBALANCE

     However, the impact could be limited, as the provinces in greater need of

increased SPB issuance are not those with quotas to spare. The latest available

2016 data suggested the outstanding SPBs issued by Beijing and Shanghai were

CNY320.8 and CNY94.9 billion below quotas and they had limited demand for bond

issuance. 

     Moreover, local governments can utilise unused cash, accumulated from the

constant fiscal surplus before 2015, which have helped cover any fiscal

shortfalls over the past 3 years. Although the amounts left in reserve at the

end of 2017 are unknown, it is likely available funding will be limited in the

coming year.

     The analysis above suggested there is still enough money to support the

mild growth of infrastructure spending in 2018, and the planned tax cut can

serve as another boost to China economy.

     Premier Li Keqiang announced Monday there will be a total of CNY800 billion

in tax cuts in 2018, more than doubled the planned CNY350 billion tax cut in

2017. This move will stimulate private sector consuming and investment,

hopefully offsetting some of the impact from the lower deficit.

     Beijing still pays great attention to the importance of investment. He

Lifeng, the Chairman of the National Development and Reform Commission told a

press conference Tuesday that "a series of measures" will be issued to promote

investment in the real economy, and the investment will contribute "around a

third" of the GDP growth in 2018. Investment contributed a total 32.1% towards

GDP growth in 2017. 

     This will certainly help the economy going forward and help negate any

impact from the lower deficit ratio hindering China in reaching its growth goal.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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