MNI: Call For China To Boost Local Debt Limits, Deficit

     BEIJING (MNI) - China should double its fiscal deficit and allow local

governments to issue more debt in order to boost the economy and meet demand for

social welfare and infrastructure, Zhang Bin, senior fellow of the China Finance

40 Forum, said in its quarterly Macro Policy Report briefing on Wednesday.

     While stricter regulations have significantly restricted local governments'

use of off-balance sheet funding vehicles, limits on their debt issuance have

not been raised, crimping infrastructure spending. Growth in infrastructure

spending sank to a record low 3.3% in the first three quarters of this year,

down from a 19.8% increase in the same period of last year.

     "When we block the back door for local government funding, the front door

should open wide, which means the fiscal budget should allow more local

government debt," Zhang said.

     About half of 2017's CNY17 trillion in infrastructure investments will not

provide fixed returns, especially social welfare projects, meaning that they

cannot be funded by bank loans or by issuing special bonds, he said.

     "Local governments have to pay the bill, but the problem is that the budget

granted to them has been so limited that it is barely sufficient," Zhang said,

adding that it was these budget constraints which pushed local administrations

into the off-balance sheet financing which has left many of them dangerously

highly leveraged.

     Including social welfare infrastructure spending in their budgets would

raise local governments' debt ratio to about 67% of output from the current 37%,

Zhang said.

     This could also push up the national fiscal deficit, as the central

government budget includes provisions for paying local debt. Zhang said he

thought the central government should consider expanding its fiscal deficit by

at least 3 percentage points, from 2.6% of gross domestic product this year.

     Authorities' crackdown on off-balance-sheet financing and shadow banking

has added to pessimistic sentiment as the economy is already pressure from the

trade dispute with the U.S., Zhang warned.

     "We think China's economy has not bottomed out yet, as exports will soften

due to a weakening global economy," he said, predicting exports may see a sharp

drop as U.S. tariffs start to bite next year.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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