CHINA IS ABOUT to end six years of Keynesian financial pump-priming as the economy no longer requires stimuli to boost its already overheated growth. Deficit budget spending helped the country maintain growth during recent difficult times. Since 1998, China has issued more than 700 billion yuan in treasury bonds, contributing an estimated one to two percentage points a year towards gross domestic product growth and helping finance roads, railways, power stations, irrigation systems and rural schools. But the spending pushed up the government's domestic debt to an estimated 22 per cent of GDP as at the end of last year, from 15.5 per cent in 1999, according to the International Monetary Fund (IMF). This ratio is still low by international standards but rises sharply if pensions, other social welfare obligations and the writing off of non-performing bank loans are included. With so much to do in future, China needs to save more while the going is good, the IMF says. The authorities in Beijing appear to be listening. 'The pump-priming proactive fiscal policy is being phased out,' the Asian Development Bank (ADB) said. The government will issue bonds worth 110 billion yuan this year, down from 140 billion yuan last year and 150 billion yuan in 2002. In its annual survey on China, issued this month, the IMF said directors had urged Beijing to save part of this year's excess revenue to reduce public investment and lower the deficit below the level targeted in this year's budget. 'The authorities' medium-term fiscal objective is to keep the nominal deficit constant [at 320 billion yuan],' it said. 'This would imply a gradual decline in the deficit relative to GDP, consistent with the medium-term fiscal adjustment path of 0.25 to 0.5 per cent of GDP per year endorsed by the executive board [last year].' China's torrid economy runs the risk of a hard landing but the strong growth offers a unique opportunity for the government to bring its budget under control and channel more resources into policy aims such as poverty alleviation. In the first nine months of this year, state revenue grew 26.3 per cent over the same period last year, to 1.93 trillion yuan, thanks to large increases in value-added, consumption and business taxes and import tariffs. The full-year revenue figure will comfortably exceed the 2.35 trillion yuan projected in the March budget. That means the budget deficit this year will be no higher as a percentage of GDP than it was last year: 2.7 per cent, according to Chinese figures. This unexpected revenue has given the government money to address issues such as repayment of arrears owed to exporters for refund of value-added tax, which soared between 2000 and 2002 because of strong export growth and reached about 300 billion yuan at the end of last year. The government can also spend more to address such problems as poverty, inadequate schooling and healthcare in rural areas, a weak social security system, a deteriorating environment and sluggish development in the centre, the west and the northeast of the country. Meanwhile, the government can reduce spending on infrastructure and other projects that were designed to push up GDP growth. Private-sector investment is strong enough to compensate for a slack-off in public expenditure. The flood of foreign investment, hot money entering in anticipation of a yuan revaluation, strong consumer spending and a high level of bank savings mean a surfeit of money in banks chasing promising projects. Nonetheless, while praising China's achievements in raising tax revenue, the IMF, the ADB and the World Bank say the deficit is still far more serious than official numbers suggest. In its report on China, the ADB said the financial deficit was substantially higher than 2.7 per cent of GDP if off-budget obligations, such as the implicit pension debt, were taken into account. A World Bank report this month said the financial obligations of local governments, whose projects accounted for 86 per cent of infrastructure investment last year, posed increasing financial risks for the government as a whole. 'Although they are not permitted to borrow directly, local governments have accumulated various, often implicit, contingent and, through investment intermediaries they own, direct financial liabilities ... they sometimes admit to not knowing all their contingent liabilities,' the report said. Local governments sometimes arranged bailouts that affected their budgets to such an extent that they were forced to request financial intervention by the central government, it said. The multilateral institutions are also calling on China to rationalise its tax system, improve collection, find a better balance in revenue sources and expenditure obligations at different levels of the government and develop a more efficient and targeted financial transfer system.