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China will need another five years of fiscal stimulus to overcome the hit from the Covid-19 pandemic to global trade, a high-ranking advisor to fiscal authorities told MNI in an interview in which he also said the government may consider new taxes on booming digital industries and should shoulder a greater share of the spending burden rather than relying on heavily-indebted local administrations.
Local administrations are being called upon to repeat the stimulus they provided after the 2008 financial crisis, but lack the capacity, said Liu Shangxi, head of the Chinese Academy of Fiscal Sciences under the Ministry of Finance, adding that the central government should instead provide more stimulus, particularly by encouraging state-owned companies to support infrastructure projects.
"Ponies are not able to draw heavy carts," he said, in reference to the local governments and suggesting that state-owned enterprises could step up to build infrastructure such as railways. Other areas for spending include developing transport and other infrastructure to link cities in clusters and providing facilities to enable migrant workers to settle permanently in urban areas, he said.
China's response to the Covid-19 pandemic has so far mirrored its actions in 2008, when the central government contributed only about CNY1.2 trillion of the total CNY4 trillion stimulus, and debt associated with local governments and their funding vehicles soared, said Liu. This year's plans include granting a record CNY3.75 trillion quota for local government to issue special project-backed bonds, although the total package of up to CNY8.5 trillion, which is pushing the budgeted fiscal deficit to a record 3.6% of GDP for the year, also includes central government special-purposed bonds. Authorities will make over CNY2.5 trillion in tax and fee cuts.
The central government is likely to reduce quotas for local special bonds in future, said Liu, noting that while local administrations had issued 95% of their quotas by the end of October, they might struggle to use all of the funds, due to a shortage of suitable projects offering sufficient profits.
As the central government boosts spending, it is likely to keep next year's tax and fee cuts to less than 2020's CNY2.5 trillion, but it also needs to push forward with reforms to add to its sources of revenue, Liu said. One potential candidate already under consideration would be more taxes on fast-growing digital industries, he said.
Policy stimulus will mean that the economy's leverage, which the government has tried to reduce in recent years, will swell again, Liu said. A higher proportion of growth will also come from further expansion of sectors which already suffer excess capacity, such as steel, he said.
Coordination of monetary and fiscal stimulus will be vital, said Liu, who has previously called for the People's Bank of China to buy government bonds, adding that monetary easing has not caused significant inflation. On a lower level, policy coordination is also key to providing targeted assistance to the economy, Liu said, noting that authorities have already taken over 1,000 sometimes-overlapping measures to support small businesses.
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