MNI INTERVIEW2: China May Sell Retail Bonds, Boost Deficit

--State Council Advisor Urges 'Special Bonds' To Restore Economy 

--Deficit-to-GDP Target May Exceed 3% On Tax/Fee Cuts, Spending Increase 

--Part 2 of 2-Part Interview

     BEIJING (MNI) - China could issue special retail government bonds and raise

the official budget deficit target to more than 3% of GDP to counter the

economic impact of the coronavirus outbreak and ease budget strains from tax

cuts and higher spending, an official advisor to the State Council, China's

cabinet, told MNI in an interview.

     "We could issue special central and local government bonds targeting

sectors impacted by the virus, which could be effective in shoring up the

economy, and sell to the people rather than just institutional investors,"

Counsellor Liu Huan said. 

     There is a "high probability" that the authorities would set a fiscal

deficit ratio above 3%, requiring bigger national and local government bond

issuance quotas, with coronavirus prompting further tax cuts and bigger fiscal

spending, said Liu, a prominent fiscal expert.

     As fiscal moves provide the bulk of stimulus, further monetary easing

should be put on hold to ensure policy coordination and to help curb rising

inflation, Liu said. Inflation already surged to an eight-year high 5.4% y/y in

January, government data showed. 

     However, moves to provide ample credit to small businesses should continue

unabated, said Liu, who is also the vice dean of School of Taxation, Central

University of Finance and Economics.

     --TOUGH YEAR

     The counsellor said 2020 would be a tough year for fiscal authorities, as

cuts in taxes and fees enacted in 2019 and efforts fighting the viral epidemic

sap revenues just as more spending is needed to support an already-weakening

growth. The CNY2.3 trillion tax-and-fee cuts sent fiscal revenue growth to a

40-year low 3.8% last year, which was practically flat after 2.9% inflation, Liu

noted.

     While the deficit will most likely expand, the authorities should still

consider further temporary cuts in value-added tax or even relieving corporate

income taxes for regions and sectors hard hit by the virus, Liu said.

     This year, the central government will have to provide additional fiscal

support to local authorities, including transferring a part of consumption tax

collected to regional administrations and increasing transfer payments, Liu

said. Consumption tax raised CNY1.26 trillion last year, 6.6% of total tax

revenue, government data showed.

     Refined oil products could be added to the list of consumption tax items to

be transferred to local government, which already includes high-end watches and

jewellery, although the national government will retain the important cigarette

and liquor categories, Liu said. Local government pension and social insurance

payments could also be eased, he said.

     --EVALUATION PROCESS

     The authorities are mindful that official local government debt problem is

more than the around CNY20 trillion sum declared, but there are also projects

financed by implicit and government-backed debt, so approvals of special-purpose

bonds will only be granted following thorough examination of the intended

projects, Liu said.

     Defaults by local-government funding vehicles will occur, but the impact

could be minimized with proper regulation, Liu said, adding that in the longer

run, the projects they financed would bring economic and social benefits.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

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