MNI: China’s Deficit To Exceed 3% As Debt Grows To Lift Growth

China is expected to increase its budget deficit-to-GDP ratio above its 3% “red line” next year, as the central government issues more Treasury bonds to support domestic demand and lift growth at a time when debt-burdened local governments are constrained in their ability to add leverage, advisers told MNI.

Advisers calculate the budget deficit-to-GDP ratio could be raised to as high as 3.2% in 2023 from this year’s 2.8% following a call by top policymakers at last week’s Central Economic Work Conference to “increase the intensity and efficiency of proactive fiscal policy” to help stabilise growth. An emphasis on controlling local government debt risks and ensuring fiscal sustainability has diminished expectations for new local government issuance as local debt ratios march closer to their warning line. (SEE: MNI: China’s Local Governments Pile On Debt In Growth Hunt)

RED LINE

“Though a 0.4 percentage point rise would only release a few hundreds of billions of funds, it is sending a strong signal of expansionary policy, given that Beijing has long been conservative in abiding by the 3% red line,” said Wang Jun, a director at China Chief Economist Forum.

China’s deficit could hit CNY4 trillion in 2023 assuming a 3.2% deficit ratio and 6.2% nominal GDP growth, Minsheng Securities analysts estimate. Given the central government’s deficit usually accounts for 80% of the total, this would equate to Treasury bond issuance of CNY3.28 trillion, up from the net CNY2.61 trillion raised as of December 9.

“It is necessary to moderately raise the deficit rate as there will be less fiscal resources available next year, given the leftovers from previous years have been largely tapped,” said Zhang Yiqun, director of a fiscal studies institute affiliated with Jilin province's finance department. He expects state-owned financial institutions to continue remitting accumulated profits to the central government and policy banks to offer targeted financial instruments to help support a recovery.

GROWING DEMANDS

Local governments will come under growing pressure to help boost consumption given top policymakers have flagged growth in domestic demand as an important driver of China’s economy, said Liao Qun, chief economist with the Chongyang Institute for Financial Studies. (SEE: MNI: China’s Retail Spending To Grow 5% As 2023 Rebound Eyed)

The surge in Covid cases will challenge local government finances. Revenues will be squeezed as consumers avoid crowded places, while spending on consumer coupons, low-income subsidies, and small business support will be indispensable in supporting growth, said Liao. More spending on healthcare is a given.

Beijing’s transfer payments to local governments hit a historical high of about CNY9.8 trillion in 2022. Zhang expects that to grow to CNY11-12 trillion next year, as local fiscal pressures remain high amid sluggish land sales. Wang said there is little immediate prospect for an improvement in the property market, which will likely keep land sales revenue subdued next year.

Meanwhile, the scale of infrastructure project-backed local government special bonds is unlikely to be largely expanded beyond this year’s CNY3.65 trillion, possibly pushing to CNY4 trillion at most, said Liao, adding that more funds should be directed to promote tech-based and green infrastructure.

BROAD DEFICIT

Wang expects a notable expansion in the broad budget deficit, ideally equal to around 9-10% of GDP in 2023, compared to this year’s of about 8%. The broad deficit includes government debt and spending which are not counted in budget deficit, such as the issuance of special Treasury bonds, which is suggested by some advisers.

Wang believes returns on additional investment are decreasing, and any issuance of special Treasury bonds should be used to revive consumer confidence hurt by reduced incomes, which will in turn improve the tax base. “The current issuance of consumer coupons by some cities are too little, and CNY2-3 trillion should be enough to drive the consumer market nationwide,” said Wang.