MNI EXCLUSIVE: China May Keep Fiscal Deficit Below 3%:Advisors

     BEIJING (MNI) - China will probably target an annual fiscal deficit of

below 3% of GDP for 2019, as it weighs the need for economic stimulus against

the risks of excessive local government debt and damaging the confidence of

international investors, official advisors told MNI.

     "So far, I see no possibility of breaking the 3% red line at least in the

first half of this year, " Zhao Quanhou, director of the financial research

centre at the Chinese Academy of Fiscal Sciences under the Ministry of Finance,

said. Exceeding this level could cause concern among foreign investors, affect

China's credit rating, and put pressure on the exchange rate of the yuan, he

said.

     Only if the economy were to suffer a significant downturn would the

government consider exceeding this level of deficit, Zhao said, predicting that

authorities would set a GDP growth target for 2019 of around 6.3%.

     Zhang Bin, researcher at the National Academy of Economic Strategy of the

Chinese Academy of Social Sciences, told MNI there would be no need for a

deficit of larger than 3% of GDP so long as employment remains stable and in the

absence of systemic risks to financial stability.

     --MORE OPTIONS

     A "more proactive" fiscal policy does not necessarily mean a higher deficit

ratio, Zhao said, stressing that increased issuance of special purpose local

government bonds, which are not included in the deficit calculation, will

support infrastructure spending and that ongoing cuts in bureaucracy will also

help allocate more resources to investment.

     "As long as the ratio is set higher than last year (2.6%), it means fiscal

policy will be more proactive," Zhao said.

     The National People's Congress in March is set to authorise special bond

issuance for 2019 of well over 2018's CNY1.35 trillion, and maybe around CNY2

trillion, Zhao said.

     In contrast to standard bonds issued by local governments, special bonds

are meant to be repaid by returns on the projects they fund. Officials see them

as a financially healthier alternative to the "invisible" debt accumulated by

local governments' off-balance sheet funding vehicles.

     "We will strictly control local governments' invisible debt to prevent and

defuse fiscal and financial risks," Zhang said.

     In addition to funding infrastructure through special bonds, the government

could also open some sectors, such as railways, and oil and gas production and

transport, to more private investment, Zhao said.

     --TAX CUTS

     Officials have promised tax cuts on a larger scale than 2018's roughly

CNY1.3 trillion, and investors expect reductions in value-added tax, individual

income tax and corporate income tax.

     However, advisors said an across-the-board reduction in the 25% headline

corporate tax rate - which provides about 22% of total tax revenue -- would only

come if the economic situation merits it. Instead, the reduction in the levy may

be implemented in a targeted way to mainly benefit small and micro companies.

     The State Council announced on Jan. 9 that it will reduce the tax burden

for small and micro-sized companies by CNY200 billion per year for the next

three years, the latest government move to aid smaller corporates that are

struggling as the economy slows.

     Tax moves for smaller companies could include deductions on spending for

high-tech research and for guaranteeing employment, Zhao said.

     "During an economic downturn, tax cuts may not stimulate companies to

expand production at a massive pace, but they could enable them to survive at

least," Zhao said.

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

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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