MNI INTERVIEW2: China Fiscal Stimulus Seen Near 10% GDP
MNI (BEIJING) - China is likely to deploy over CNY10 trillion in fiscal stimulus over the next few years to ensure the economy grows by its target of around 5%, a prominent policy advisor told MNI, adding that CNY1 trillion of special treasuries could be issued later this year and calling for a CNY2 trillion fund to stabilise the stock market.
Stimulus could be equivalent to more than 10% of GDP, which totalled CNY126 trillion in 2023, to push consumer and producer price inflation towards 2-3%, said Zhang Ming, who participated in Premier Li Qiang’s advisory meeting earlier this month.
The government should continue to target growth of “around 5%” over the next five years, and policy will remain expansionary, said Zhang, senior fellow and deputy director at the Institute of Finance & Banking at the Chinese Academy of Social Science.
“I am optimistic about fiscal strength next year as more government debt, particularly special treasuries, will be issued to tackle local government implicit debt and support key sectors of the economy,” he said in an interview, after Finance Minister Lan Fuan pledged early this month to raise the government’s debt limit and increase the fiscal deficit to stimulate a slowing economy and bail out overly-indebted local governments. (See MNI INTERVIEW 2: China Fiscal Expansion Crucial, RRR Cut Eyed)
Zhang has also called for a 2% CPI target, noting the central bank would likely further ease policy rates 50-100 basis points over 2025. (See MNI INTERVIEW: PBOC To Cut Rates Further, Target 2% CPI)
SPECIAL TREASURIES
Authorities should issue CNY1 trillion of special treasures next month to ensure its spending impact will be felt after one or two quarters, Zhang said, adding the government should sell another CNY3-CNY4 trillion in treasuries in H1 2025.
The government could also increase its fiscal deficit to 4% of GDP, and ditch its rule – originally based on EU borrowing limits – on deficit caps and overall public debt, which is currently set at 3% and 60% of GDP respectively, he continued.
As the economy’s previous real-estate and infrastructure growth engines lose steam, stimulus should focus on social welfare and consumption, Zhang argued, adding special treasuries could be used to fund pensions, healthcare, education and affordable housing, as well assisting service industries and small- and medium-sized enterprises with a high propensity to hire workers. Funds could also buoy the incomes of groups, such as college graduates and returning migrant workers, he said.
In contrast to the CNY4 trillion in stimulus deployed in response to the global financial crisis in 2008, fund-raising this time will come mainly from the central government, not local governments or their now over-leveraged funding vehicles, Zhang noted.
DEBT SWAPS
While the total scale of local governments’ off-balance-sheet borrowing remains unclear, Zhang estimates it at CNY40-CNY50 trillion, making up about 40% of the country’s total government debt.
Minister Lan has stated authorities are planning a large swap aimed at local governments’ hidden debt, which Zhang believes will need to be at least CNY4-CNY5 trillion over each of the next two years given the estimated CNY10 trillion in maturities over that period. This would be comparable in scale to the total CNY12.2 trillion in local debt swapped by the government from 2015-2018.
Most of the hidden debt will move onto local governments’ balance sheets, but with longer maturities than the current average of about three years and with lower interest rates, Zhang said.
While the central government may use funds from special treasuries to acquire some of it directly, particularly that related to projects launched during Covid, this amount will be limited in order to avoid moral hazard, he commented.
Noting the increasing official focus on stabilising stock markets, Zhang suggested fiscal authorities could use CNY2 trillion of special treasuries to establish a fund to invest in blue-chip shares or ETFs. This would provide longer-term benefits, in combination with the People’s Bank of China’s new swap facility and relending tool for stock buy-backs, he said.