China’s slowing economic growth and potential headwinds may suggest fiscal loosening is imminent

Analysts say weak retail consumption, slowing exports and hardships facing small and medium-sized businesses all suggest government spending needs to rise

China’s finance ministry has so far remained tight-lipped on further fiscal loosening, instead vowing to address fiscal sustainability

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Beijing has stressed the importance of supporting small and medium-sized businesses, and analysts say that doing so may necessitate a loosening of China’s fiscal policies. Photo: Reuters

Published: 6:14pm, 20 Jul 2021Updated: 10:43pm, 20 Jul 2021

China’s slowing investment approvals and lower-than-expected pace of government spending have fuelled debate over whether the country should be ramping up fiscal spending, particularly as economic growth looks to wane in the coming years.

In the first six months of this year, China’s fiscal expenditure rose 4.5 per cent from a year earlier to 12.2 trillion yuan (US$1.88 trillion), accounting for 49 per cent of the annual budgeted total. In comparison, revenue, which rose 21.5 per cent, already reached 59 per cent of the year’s budgeted income, data from the Ministry of Finance showed on Tuesday.

Meanwhile, only 1.01 trillion yuan worth of special-purpose government bonds were sold in the January-June period, or 28 per cent of the full-year expected total, according to data compiled by debt-clearing house ChinaBond.

The fiscal consolidation was accompanied by slower project approval and infrastructure investment.

Concerned analysts say there needs to be a further loosening of China’s fiscal policies to offset potential headwinds, including sluggish retail consumption; struggling small and medium-sized enterprises; and potentially slowing exports.

“Although China has beaten the pandemic and has led the world in terms of economic recovery, the national economy has failed to reverse its slowing trend since 2010,” said a statement released at the weekend by Chinese Academy of Social Sciences researchers Yu Yongding and Xu Qiyuan.

The debate has ratcheted up ahead of next week’s quarterly economic-assessment conference of the Politburo, the centre of power within the Communist Party. Many analysts believe a reset in policy tone towards fiscal loosening is imminent. Last week, China posted second-quarter economic growth of 7.9 per cent, down from 18.3 per cent a quarter earlier.