China’s fiscal ambition to increase debt risks
China is pinning its hopes on fiscal stimulus to bolster growth, which analysts say could increase the government’s debt risk
As monetary easing is becoming less and less effective to drive China’s sluggish economy, the country is pins its hopes on sweeping fiscal stimulus to bolster growth, which analysts say could increase the government’s debt risk.
As the economy slows, aggressive monetary easing has so far failed to translate into faster growth, merely inflating asset prices, said Jacqueline Rong, the China economist at BNP Paribas, in a research note.
That tallies with what Sheng Songcheng, an official from the People’s Bank of China, said earlier this year. He warned that China risked falling into a “liquidity trap”, where companies prefer to hoard cash rather than invest it despite the large amount of liquidity in the market.
As the effectiveness of monetary easing is diminishing, China has no choice but to set its sights on fiscal stimulus to drive the economy.
If China continues to pursue such expansionary fiscal policy to bolster economic growth, it will take just a few years for government debt to become a bigger problem
According to the ministry of finance, central and local government debt amounted to just 50 per cent of gross domestic product as of the end of last year, far less than the average level seen in most developed countries.
Therefore “there is still scope for fiscal stimulus”, Rong said.