Slower revenues hampers Beijing spending
The ability of Beijing to inject cash to boost the economy, as has been the pattern, is limited this year by a sharp fall in the growth of its revenues
The mainland spent more than planned in the first nine months of this year and revenue gains moderated, leaving little room for public outlays to stoke the economy this quarter without an expansion of the budget.
Revenue rose 10.9 per cent in the January-September period from a year earlier to 9.06 trillion yuan (HK$11.23 trillion), compared with a 29.5 per cent gain in the same period last year, Ministry of Finance data showed. Spending in the period rose 21.1 per cent, higher than the targeted 14.1 per cent rise for the full year, leaving a surplus of about half last year's level.
"The effects of China's fiscal policy were expansionary in the first nine months but will be neutral in the fourth quarter as spending won't be higher than a year earlier," said Ding Shuang, a senior China economist with Citigroup in Hong Kong, who formerly worked at the People's Bank of China and International Monetary Fund. "Policy effects from previous months will ensure a modest recovery, but the rebound is restrained."
Policymakers across Asia have restrained their stimulus efforts compared with 2008-09 as global expansion slowed, either opting to preserve firepower should Europe's crisis worsen, or seeking to avoid asset-price bubbles. Premier Wen Jiabao's government has fought to rein in housing costs in the run-up to the leadership transition that starts next month.
The Finance Ministry had allocated 97 per cent of the year's budgeted funds for infrastructure spending by the end of last month, Xinhua reported last week. In railways, for example, spending plans this year were boosted by about 25 per cent to 516 billion yuan.
Shares of CSR and China CNR, the two biggest train makers, got a boost after the Economic Information Daily reported 13 railway infrastructure projects were added to construction investment plans. The stock market's Shanghai Composite Index has dropped 17 per cent in the past year as corporate earnings slumped owing to the seven-quarter slowdown in growth.
The annual budget endorsed in March by the National People's Congress set a target deficit of 800 billion yuan and any change would require the legislature's approval.
"The money left for spending in the coming months is very limited," said Song Guoqing, an adviser to the central bank and professor at Peking University. "That will put a question mark on whether the present economic recovery will be sustained. The government can revise the budget if it really wants to. So far, there is no sign that the budget will be altered this year."
Data released this month suggests the worst is over for the slowdown. Factory production, retail sales and fixed-asset investment showed bigger-than-forecast gains last month, while industrial companies' profits rose for the first time in six months. Five out of 25 economists surveyed this month forecast at least one lending-rate cut in the next two months, down from 15 of 25 in last month's survey.
This year's allocation and spending of funds will not necessarily constrain the ability of a government with US$3.3 trillion in foreign exchange reserves to stimulate the economy. China had outstanding treasury debt of 7.2 trillion yuan at the end of last year, about 15 per cent of GDP.
"Most of the infrastructure investment is not financed explicitly by fiscal resources or on the budget but through other means," said Wang Tao, the chief China economist at UBS in Hong Kong.
Bank lending and bond sales were the main financing channels, she said.
After Wen announced a four trillion yuan stimulus package during the global financial crisis in 2008, the central government provided 1.18 trillion yuan, leaving local governments to borrow other funds. Banks provided 9.6 trillion yuan of new loans in 2009 and 7.95 trillion yuan in 2010.
Loans totalling about 8.5 trillion yuan this year, along with expanded bond issuance and borrowing through trust companies, would help the economy grow 8.3 per cent next year, said Joy Yang, the chief Greater China economist at Mirae Asset Securities (HK), who previously worked at the IMF. The economy expanded 7.4 per cent in the third quarter from a year earlier.
Even so, banks were failing to take advantage of loan discounts, limiting them to 10 per cent of the benchmark lending rate for the top clients, officials at the top four lenders said this month.
Annual budget reports have underestimated revenue growth to allow for heavy spending approaching the end of the year, a seasonal effect that may disappear this year, Song said.
"Fiscal firepower is not as strong as past years," Yang said. "That's one of the downside risks for the fourth quarter."