Chinese local governments urged to boost spending

Central government is pushing the mainland's provinces to release more funds for investment

PUBLISHED : Thursday, 26 June, 2014, 1:08am
UPDATED : Thursday, 26 June, 2014, 1:08am

The mainland's anti-corruption drive shows no signs of waning, but securing this year's economic targets also appears to be at the top of the government's agenda, with analysts saying fiscal policy is likely to serve as a major catalyst.

While local governments' spending on catering and other forms of entertainment may stay tight, they are being pushed to release more funds to speed up investment, even though fiscal revenue growth has eased amid an economic slowdown.

Authorities from Heilongjiang to Sichuan rolled out plans this week to boost fiscal spending and use subsidies as well as cash rewards to encourage new projects.

The change came after Premier Li Keqiang criticised local officials at a recent meeting for inaction, as their enthusiasm for fresh investments cooled amid concerns they could end up getting involved in anti-corruption probes.

Days after that meeting, Li reassured an international audience during a visit to Europe that there was no way the mainland would miss its economic targets, including "keeping economic growth at about 7.5 per cent" and "creating at least 10 million new jobs" this year. His promise prompted some analysts to raise their forecasts for gross domestic product growth this year.

"The anti-corruption campaign has dealt a blow to [fixed-asset investment] growth due to government officials and [state-owned enterprise] executives' inaction, either because they are in fear of corruption charges or because they are not financially motivated," said Bank of America Merrill Lynch China economist Lu Ting. "But since the Chinese government vowed to achieve the 'around 7.5 per cent' growth target, we believe in the short term Beijing will have to offset the demand shock by stepping up fiscal stimulus and monetary easing."

After the People's Bank of China made two cuts to lenders' reserve requirement ratios to free up more liquidity, the government is expected to avoid any strong monetary stimulus that could create new financial risks. Analysts say fiscal policy may become more active in driving growth, helped by further moderate easing of credit.

Heilongjiang's provincial government pledged on Monday to invest hundreds of billions of yuan this year and next, including 80 billion yuan (HK$100.61 billion) on railways and roads, 49.4 billion yuan on water projects and 27 billion yuan on agricultural production bases.

The province's GDP grew by just 4.1 per cent year on year in the first quarter, lagging all other regions of the mainland, where the overall economy grew by an 18-month low of 7.4 per cent.

The province also pledged to offer cash rewards for fast-expanding manufacturers and lower-tier governments that manage to achieve rapid fixed-asset investment growth.

Finance Minister Lou Jiwei warned on Tuesday that the central government might struggle to meet this year's fiscal revenue target, citing "persistent downside pressures in economic growth" and tax reform.

But analysts say there is room for a more expansionary fiscal policy.

Central and local government debt added up to just 40 per cent of the mainland's GDP, well below the 80 per cent to 90 per cent levels in some developed countries, Everbright Securities chief economist Xu Gao said.

The ministry was planning for a national deficit of 1.2 trillion yuan this year, or about 2 per cent of estimated GDP.