MNI INSIGHT: Debt Caution May Cap China's 2019 Fiscal Deficit

--Deficit Unlikely To Be More Than 3% Of GDP

--Officials Wary Of Excessive Borrowing

     BEIJING (MNI) - China is unlikely to raise its planned fiscal deficit for

2019 higher than 3% of gross domestic product, MNI understands, highlighting the

dilemma for officials trying to revive growth from its lowest level in nearly a

decade without permitting an explosion in debt like that seen after the

financial crisis.

     A decelerating economy, with fourth quarter GDP expected to have expanded

more slowly than the third quarter's 6.5% - already the lowest since 2009 - has

prompted a relaxing of President Xi Jinping's three-year-old deleveraging

campaign. But, while officials are now trying to encourage more lending to

private sector companies, a proactive fiscal policy is seen as key.

     Finance Minister Liu Kun has announced as much as CNY1.3 trillion in tax

and fee reductions this year, while an even larger package is promised for 2019.

Infrastructure investment also ramped up in October, mainly through fiscal

spending, after historically low 3.3 percent growth in September.

     Some advisors have called for aggressive increases in public spending, not

only to stimulate the economy directly, but also to boost the supply of bonds to

serve as collateral for banks requiring access to central bank liquidity.

     --DEFICIT LIKELY CAPPED AT 3% OF GDP

     However sources in and close to the government have told MNI the deficit

for next year is unlikely to be raised higher than 3% from this year's 2.6%. If

this is approved at the National Congress in March, the government will find

itself with plans for bigger expenditure just as revenue likely falls.

Month-on-month revenue growth turned negative in October, after cuts to

value-added tax and fees.

     "The government doesn't want to take on too much debt," one official said.

Beijing already has a big enough headache dealing with local governments as they

struggle to pay back liabilities raised through funding vehicles, a large chunk

of which is due in 2021-2023, the official said.

     The need for a heavier reliance on government spending is in part due to

the success of another official policy, as officials cracked down on excessive

credit, including the off-balance sheet borrowing by state-owned enterprises and

local administrations.

     China's debt/GDP ratio grew by 2.7 percentage points to 250.3% in 2017,

down from average growth of 13.5% in 2012-2016, according to the People's Bank

of China's 2017 monetary policy report. Broad M2 money supply growth fell to a

record-low 8.0% last month, amid concerns that the private sector - the biggest

source of employment - is starved of capital.

     Officials now fret they may have pursued deleveraging with too much

enthusiasm. PBOC Governor Yi Gang on Nov. 6 blamed the negative effects of

deleveraging on a lack of policy coordination and inconsistent implementation,

and, in its third quarter monetary report, the PBOC deleted a reference to

"implementing structural deleveraging."

     --STABILISING LEVERAGE

     The new PBOC phrase, "stabilising leverage levels", means no further

reduction of the debt/GDP ratio, one official told MNI. Central and local

governments may issue limited amounts of debt to offset downward economic

pressure, the official said.

     But some officials fear the change of course may not achieve its aims or

even cause new problems, MNI understands.

     "I prefer to see recent moves as an amendment to a rapid deleveraging,

rather than stimulus policies," one government advisor told MNI. "Making the

current policy adjustment is necessary, or the economy would deteriorate even

faster."

     Authorities are also trying to prompt banks to deliver badly-needed credit

to private companies. While banks' reserve ratio requirements have been cut four

times this year and ample central bank liquidity pushed the benchmark 7-day

reverse repo rate as low as 2.2490% -- below the 2.55% policy rate for the same

period -- total social finance slumped to CNY728.8 billion in October, less than

one third of September's total.

     --BANKS CAUTIOUS ON BOOSTING LENDING TO PRIVATE FIRMS

     Initially, authorities hinted at forcing banks to lend. Guo Shuqing,

chairman of both the China Banking and Insurance Regulatory Commission and the

Communist Party at the PBOC, said on Nov 8 that regulators were considering

requiring 50% of new corporate loans to be made to the private sector within

three years. A plunge in bank shares prompted a speedy backtrack.

     "Such an administrative move could trigger a rise in bad loans," said the

adviser. Private firms are riskier in current economic conditions, the adviser

said.

     Lenders, facing a difficult choice between complying with regulators'

wishes and managing risk, may find ways to circumvent any such requirement.

     "We may reduce new lending altogether to meet the requirement if such

regulation is enforced," one bank manager told MNI.

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

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

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