MNI EXCLUSIVE: China Could Cut Deficit To 3% In 2021

China will be able to withdraw fiscal stimulus measures and lower its record high budget deficit next year as growth could pick up to about 8% but the rollback should be gradual to avoid further stress on local government finances, policy advisors told MNI.

Beijing may seize the opportunity offered by the robust recovery to lower the budget deficit ratio to 3% of GDP, its line in the sand, according to Zhang Yiqun, director of a fiscal studies institute affiliated with Jilin province's finance department. This would cut the budget deficit by CNY760 billion to CNY3 trillion, Zhang said.

Although the funding gap will be eased by higher fiscal incomes and mandated expense cuts, local governments will get a lower share of revenue due to China's uneven distribution system. Land sales, a major source of their income, are also under pressure due to tighter financing rules for developers.

"Stimulus should exit at a gradual pace to ensure growth next year," said Wang Jun, an academic committee member at the China Center for International Economic Exchanges. Wang, also chief economist at Zhongyuan Bank, thinks a budget deficit ratio around 3.3% will cushion the impact on local governments.

Zhang urged Beijing to continue to move funds to local governments through the existing transfer scheme to support salary payments and daily operations.

STIMULUS

This year's deficit target was raised to a historical high of over 3.6% from 2019's 2.8% as Beijing unleashed stimulus measures totaling CNY11 trillion that included a substantial boost to investment.

The package included a CNY1-trillion sale of special Chinese treasury bonds while the quota for special purpose local government bonds to finance projects was raised 74% to CNY3.75 trillion. Advisors agreed there may not be any new sale of special treasury bonds next year and that the 2021 quota for local government special bonds should not be lifted further given the need to control leverage.

Liu Xiangdong, deputy director of Economic Research at CCIEE, forecasts GDP growth of about 8% next year, which will lift revenue and make room to normalise the deficit ratio around 3%.

He expects growth to benefit from higher consumption and the lag effect of investments. "Many projects were not implemented until May," said Liu. He forecasts infrastructure investment, which grew 0.7% y/y/ in the first 10 months, to rebound to 1% by year end and rise to over 10% next year helped by the low base and as more large projects start in the first year of the Five-Year Plan ending 2025. Exports will also grow due to greater demand from recovering economies, he said.

POLICY SUPPORT

Still, there will be some impact on infrastructure investment with the exit of fiscal stimulus, while property investment could slow to 2-3% from the current 6.3% level for the first 10 months due to tight financing rules, Wang said.

He expects the rebound in manufacturing investment to provide some offset. "Upstream commodity prices are recovering, and manufacturers' profits are increasing," said Wang. The Five-Year Plan stresses the importance of the sector, so more policy support could follow, he said.

Wang expects GDP growth between 8-9% next year from the low base of possibly 2.2% this year. Retail sales will grow over 8% next year due to rising incomes and consumer confidence, he said.