MNI INTERVIEW: China May Slow Stimulus-State Council Advisor

--China's 2020 Deficit May Come In Below 3.6% Of GDP, Liu Huan Says

     BEIJING(MNI) - China is likely to ease off its fiscal stimulus in the

second half of the year as the economy surges, but also as government revenues

come under pressure and with an eye to rising public debt levels, an advisor to

the State Council told MNI.

     If the Covid-19 pandemic continues to wane within China, the government

might keep its 2020 fiscal deficit below 3.6% of gross domestic product, Liu

Huan, a counsellor to the State Council, said in an interview. This would

compare favourably to the ceiling "above 3.6%" set by the National People's

Congress, China's top legislative body, in May.

     In future years, the government should be able to return to its previous

deficit target of 3% of GDP, Liu said, predicting that the rebound from Covid

lockdowns should further accelerate in the second half, taking full-year growth

to as much as 3%.

     If the pandemic flares again, the authorities have sufficient fiscal tools

to respond, and could even resort to quantitative easing, although this a

measure they would take only in extraordinary circumstances, said Liu, also

deputy dean of School of Taxation at Central University of Finance and

Economics.

     --STAGNANT REVENUES

     But, so far, the need for further stimulus is being reduced, even as

officials run up against constraints including slowing government revenues,

which have been hit not only by the effects of the lockdowns earlier this year,

but also by repeated cuts in taxes and fees over the past few years, the

counsellor said. Revenues might be flat or even decline in 2020, he said, adding

that it could be the first time in 40 years of following fiscal policy that he

has seen anything other than growth in the category.

     Officials should also be aware of the long-term financial burdens imposed

on government by increased debt issuance, Liu said. In addition, stimulus

spending runs the risk of fueling inefficient activity, such as low added-value

manufacturing and the construction of empty "ghost cities", he added, referring

to the economic distortions left in the wake of the CNY4 trillion stimulus

package in response to the 2008 global financial crisis.

     This time round, the authorities are taking more care to direct stimulus

funds, coming in part from a CNY1 trillion deficit increase and CNY1 trillion in

special treasury bonds, to efficient destinations, Liu said.

     Plans announced by Finance Minister Liu Kun for issuance of CNY8.51

trillion of government bonds for the year, CNY3.6 trillion more than in 2019,

are "unprecedented", Liu said, noting that total general fiscal expenditure is

expected to reach a record high at CNY24.79 trillion.

     --LITTLE ROOM FOR TAX CUTS

     The outlook for revenue was gloomy even before the Covid-19 outbreak, he

said, pointing out that most local governments had already lowered income growth

targets, due to concerns over the deteriorating external trade environment and

the accumulated effect of recent years' tax and fee cut.

     Any additional stimulus is unlikely to include much in the way of further

tax cuts. Premier Li Keqiang said in his working report in May that the country

will reduce fees by as much as CNY2.5 trillion this year, but Liu said that only

CNY500 billion would come from new measures, while CNY2 trillion would result

from previously-announced moves.

     With infrastructure investment a key driver for economic growth, fund

raising by local government funding vehicles will be crucial. But local

governments' overall liabilities, including their implicit debts, will be

closely monitored, Liu said, adding that he was also concerned that some

projects might not produce sufficient returns to easily repay their associated

debts on time.

     While China's public debt-to-GDP ratio was only 38.5% at the end of 2019,

according to Ministry of Finance figures, this does not include local

governments' off-balance sheet liabilities.

     China's per capita income is also lower than that of many of its

competitors and corporate profits are relatively poor, both of which factors

constitute constraints on debt servicing, Liu said.

     But debt payments are equivalent to less than 40% of China's total

government spending, well below the 100% level which officials would regard as

the maximum level permissible, he said.

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

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