17 December 2018
President Xi Jinping (left) and Premier Li Keqiang at the opening session of the National People's Congress in Beijing on Saturday. Photo: Reuters
President Xi Jinping (left) and Premier Li Keqiang at the opening session of the National People's Congress in Beijing on Saturday. Photo: Reuters

China expands fiscal deficit to boost growth

I’ve told some friends that the spotlight of this year’s government report would be on fiscal deficit.

Premier Li Keqiang said at the National People’s Congress over the weekend that China would expand the fiscal deficit to a record of 2.18 trillion yuan (US$334.6 billion) this year, up 560 billion yuan from 2015. The fiscal deficit will account for 3 percent of the GDP.

In the meantime, the nation’s M2 or broad money supply will increase by 13 percent this year, in a sign that Beijing would continue to print money to stimulate growth.

Also, the authorities set a GDP growth range of 6.5 to 7 percent for the first time.

The central government will account for 64 percent of the total fiscal deficit this year, while local governments will represent 36 percent. There are around 400 billion yuan of off-budget deficits.

Does it mean China’s economy is falling apart if it reaches the red line of 3 percent deficit ratio?

The benchmark has been set by European Union, and China is not obliged to obey this rule.

Besides, it’s not applicable for China due to different circumstances. Many developed nations also have higher fiscal deficit ratios than the alarming 3 percent.

China needs expansionary fiscal policy to boost growth as the nation is trying to eliminate excessive capacity and draw down inventory.

Proactive fiscal policy would help bolster economic growth, although it may put some pressure on the currency in the long run.

Anyway, expanded fiscal deficits would benefit both the mainland and Hong Kong’s economic growth in the medium term, as well as stimulate the capital market.

It’s more efficient to drive economic growth with increased government spending as well as loose monetary policy.

1. Macro policy key points
- GDP growth in the range of 6.5 to 7 percent;
- Reduce energy consumption by 3.4 percent;
- CPI within 3 percent, urban unemployment rate within 4.5 percent;
- M2 growth 13 percent;
- Government deficit: 2.18 trillion yuan, 3 percent of GDP;
- 400 billion yuan local government special bonds;
- Cut tax and fees, implement tax reform.

2. Financial reforms
- Risk supervision, deepen interest rate market reform, optimize renminbi exchange rate formation;
- Deepen reform of state-owned commercial banks and policy banks, develop private banks;
- Push reforms in equity, bond markets, lift weighting of direct financing, launch “Shenzhen-Hong Kong Stock Connect” at appropriate time;
- Establish catastrophe insurance;
- Regulate internet insurance, develop inclusive finance and green finance.

3. Supply-side reforms
- Focus on steel, coal sectors in eliminating excessive capacity in an orderly manner;
- Improve quality of consumer products, upgrade manufacturing and accelerate modern service sector;
- SOE reforms: concentrate on SOEs, especially central SOEs, and divide them into different groups.

4. Agriculture
- Speed up development of modern agriculture and help farmers increase income;
- Reduce corn planting area, support deep processing of farm produce and extend the industry chain. Convert 15 million mu of degraded farm land into forest and grass land;
- Complete demarcation of permanent farmland and cap usage of pesticides and fertile;
- Public service: build 200,000 kilometers of new rural road, upgrade electricity network and develop e-commerce;
- Lift more than 10 million people out of poverty. Central financial funds will amount to 20.1 billion yuan, an increase of 43.4 percent, for poverty alleviation.

5. Foreign factors
- New level of opening-up to achieve win-win;
- One Belt, One Road: construct cooperation mechanism for customs clearance and build global logistics network;
- Set foreign renminbi funds;
- Stop slide in exports;
- Further liberalize foreign investment, expand opening-up of service and manufacturing sectors;
- Accelerate free-trade zone talks with South Korea and Japan.

6. Environmental protection
- Focus on smog, water pollution; work for PM2.5 levels to drop in key regions.

7. Livelihood and healthcare
- Improve livelihood;
- Job skills training for over 21 million migrant workers;
- Healthcare subsidy fund grows by 9.6 percent to 16 billion yuan;
- Integrate urban and rural residents’ basic medical insurance;
- Increase fiscal subsidy for basic public services from 40 yuan per person to 45 yuan;
- Increase urban and rural recipients of subsistence allowances by 5 percent and 8 percent respectively.

This article appeared in the Hong Kong Economic Journal on March 7.

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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