MNI: China Seen Sustaining Fiscal Stimulus As Total Deficit Up

Chinese policy will remain fiscally expansionary in coming years to ensure annual growth of about 5% and avert the danger of low inflation, policy advisers and economists told MNI after the government announced measures which will raise its overall fiscal deficit to a recent-year-high CNY8.96 trillion in 2024.

While the fiscal deficit target of 3% of GDP or CNY4.06 trillion revealed by Premier Li Qiang at the National People's Congress opening ceremony on Tuesday fell short of expectations of 3-3.5% and was lower than 2023’s actual deficit of 3.8%, adding in issuance of special treasury bonds, local government special bonds and other instruments will take it to a total of CNY8.96 trillion this year, up from 2023’s CNY8.68 trillion, said Yuekai Securities Chief Economist Luo Zhiheng. Last year’s headline fiscal deficit target had originally been set at 3%.

Some 82% of the official deficit will fall to central government, the highest proportion in years, as the national administration takes on more of the burden of stimulus from heavily-indebted local authorities, said Luo. In addition, CNY1 trillion in special treasury bonds will also ease financing needs for local governments, he said. The quota for additional local government special bonds of CNY3.9 trillion was less than the expected CNY4 trillion.

Both fiscal and monetary policies will have to remain expansionary in coming years, with further measures required to boost investment and consumption as the country aims to double 2020’s gross domestic product by 2035, a policy advisor said. This will require average annual growth of a challenging 4.73% from 2021, he added, pointing to the decisions to issue the ultra-long special treasury bonds and increase fiscal spending by CNY1.1 trillion. (See MNI INTERVIEW: China Consumption Key To Growth - Advisor)

INFLATION HIGHER PRIORITY

Targets revealed by Li Qiang included the creation of over 12 million new urban jobs.

The reference in the premier’s work report to CPI as being key for considerations over money supply showed how boosting inflation has risen up the list of priorities for policy makers, said the advisor. Fiscal stimulus will take a main role, with monetary policy playing a support role, he added. (See MNI: China To Target 3% CPI Rise Despite Deflation Pressure)

Last year’s inflation of 0.2% fell well short of the “around 3%” target, which has been set again for this year. (See MNI: Soft China Inflation To Persist, Oversupply Will Weigh)

The 2024 work report also placed new emphasis on the need to ensure that monetary policy easing is transmitted to the real economy, and does not simply fuel arbitrage. The advisor pointed out that the disparity between last year’s 9.7% growth in the M2 measure of the money supply and 1.3% in the narrowest M1 measure indicates that easing was not being properly transmitted.

PBOC EASING

Monetary policy is increasingly designed to focus on addressing structural issues, said Wang Jun, director at the China Chief Economist Forum and chief economist at Huatai Asset Management, though he added that the authorities will still have to deploy it to boost aggregate demand. The People’s Bank of China is likely to make two further cuts to its medium-term lending facility for a total of at least 20 basis points this year, together with making an additional reserve requirement ratio cut following February’s 50bp reduction. (See MNI PBOC WATCH: Hefty 5Y LPR Cut Aimed At Mortgage Support)

“Without expansion in demand and a moderate increase in prices, it is hard to pursue major national strategies,” he said.

Real interest rates remain high with inflation so low, he noted, adding that lower interest rates would also favour government bond issuance.

Fixed-asset investment will need to accelerate by at least one percentage point this year to above 4%, to compensate a likely deceleration in retail sales growth by a similar amount to about 5.5%, due to a higher comparison base, said Xu Hongcai, deputy director at the China Association of Policy Science’s Economic Policy Commission.

Targeting growth for 2024 of “about 5%” is a feasible goal, given that local governments growth targets average 5.4%, Xu said. (See MNI: High Local Targets Hint At Further China Gov. Leverage)