MNI INTERVIEW 2: China 5% GDP Growth Depends On Land Revenue

China’s economy risks missing Beijing’s “around 5%” GDP growth target this year should local governments fail to increase land revenue and meet their increased combined fiscal outlay, an economic policy advisor has told MNI.

“The central government will need to raise additional debt to fund fiscal plans should land revenue fall short of expectations,” said Zhang Bin, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

Fiscal policy will have a more significant impact on GDP this year, he added in an interview, pointing to the CNY40.5 trillion in planned general public budget plus government funds, up 8% y/y. The 5% growth target looks within reach should governments meet their spending commitments, he said.

Following the downturn in the property market, recent data showed the government collected CNY579.96 billion in 2023 from the transfer of state-owned land rights, down 13.2% y/y. MNI reported last week that Beijing planned to increase off-the-book special government debt issuance and extend its maturity to raise funds for mid- and long-term growth initiatives, while considering additional revenue sources for local governments. (See MNI INTERVIEW: China To Extend Debt, Reform Local Gov Tax)

Economic indicators suggest a high savings, low investment demand scenario is unfolding, justifying expansionary fiscal intervention to address idle resources, Zhang added, noting increased government spending should take priority over controlling debt risks. “Restoring macro health supports debt sustainability anyway,” Zhang argued.

China requires productive investment in several areas, such as soft infrastructure development and projects linked to safety and urban-rural integration, he added, noting a focus on social security over direct cash handouts would encourage consumer spending by freeing up savings.

TARGET JUSTIFIED

Although international investors estimate GDP should grow by 4.6%, Zhang believed China’s target was logical given the economy’s potential had fallen only slightly from the 6% pre-pandemic consensus.

China’s growth remained faster than developed countries and gains in technological advancement – such as industrial upgrading, and urbanisation – could offset the negative effects of demographic change to some degree, Zhang continued. Longer-term estimates, however, were more uncertain, he added.

The government typically set “stretch targets” that allowed the system to work towards challenging objectives, Zhang explained pointing to its 5% GDP target. Policy that pushes the economy toward that target will boost household and business income, given nominal GDP should increase 7% if CPI rise by 2% y/y, Zhang predicted.

Zhang also told MNI the central bank will pursue policy rate reductions to lift credit demand. (See MNI INTERVIEW: PBOC To Cut Rates To Boost Credit - Zhang Bin)