MNI:China To Raise 2025 Deficit Ratio, More Special Bonds Eyed

MNI (BEIJING) - China is likely to raise its budget deficit target for 2025 to as high as 3.5% of gross domestic product, and to increase issuance of special government bonds to provide additional stimulus for the economy, advisors told MNI, predicting authorities would announce further measures during the Central Economic Work Conference in December.

“The deficit-to-GDP ratio could be raised to about 3.5% next year from 2024’s 3%,” said Zhang Yiqun, director at a fiscal studies institute affiliated with Jilin province’s finance department, after Finance Minister Lan Fo’an told reporters last Friday that more proactive fiscal policies including utilising the deficit space available and expanding issuance of special bonds would be pursued next year to meet economic goals.

Zhang believes authorities should again target GDP growth of around 5% next year, and that to achieve this would require adding about CNY700 billion to budget deficits, in order to increase transfer payments to local governments. 

Though some economists anticipated a potential increase in the deficit ratio to 4%, government advisors told MNI this is unlikely, especially given the economic rebound seen in Q3 and signs of real-estate market stabilisation.

Fresh issuance of local government special bonds, which are repaid using income from projects they are used to finance, is likely to be increased to about CNY4.5 trillion from CNY3.9 trillion this year, Zhang said, adding that it was possible some of the proceeds could be used to increase support for upgrading factory equipment and consumer trade-in programmes.

At least CNY2 trillion in ultra-long-term special treasuries will be needed, with CNY1 trillion for major national strategic projects and another CNY1 trillion for improving public welfare, said an advisor familiar with fiscal policy, who expected a deficit target of around 3.3% of GDP and issuance of CNY4.5 trillion of local special bonds.

Although the government last week unveiled a significant CNY10 trillion plan to swap local governments “hidden” off-balance sheet debts, debt restructuring alone does not generate new spending on investment or consumption, the advisor told MNI. Authorities are likely to unveil fresh real estate-related stimulus, and CNY1 trillion special treasuries could potentially be used to acquire unsold housing and idle lands.

More measures are likely to be announced as soon as next month when the annual Central Economic Work Conference kicks off, the advisor added.

REFORMS NEEDED

Xu Lin, chairman of China-U.S. Green Fund, who is also a former official at the National Development and Reform Commission, said the CNY10 trillion plan, which aimed to mitigate local debt risk, will buy time for local governments. The housing market recovery in first-tier cities will gradually feed through to second- and third-tier cities over the next two-to-three years, he said. (See MNI: China Property To Stabilise Within A Year - Experts)

However, the prospect for recovery in lower-tier cities is complicated by population outflows and less room for discounting, he added, suggesting market clearance should be allowed to accelerate the progress. Local governments may still struggle as their revenue from land sales continues to decline over the near-term, Xu said, urging the relaxation of administrative controls to release more investment opportunities in services, and in the digital and green economy.

Hundreds of billions of yuan in investment in the low carbon transition in the next few decades has the potential to offset largely the weakening of the real-estate market, according to Xu. “The proportion of green electricity will reach more than 80% in the future, compared to the current about 34%, but investors are still facing strict controls over project approval,” he said.

Though not ruling out the possibility of fresh stimulus, Xu said reform is the key to fully releasing domestic demand in preparation of trade uncertainties, pointing to restrictions limiting spending in areas such as high-end services. (See MNI: China Domestic Stimulus Needed To Counter Trump-Advisors)