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
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.
Using economic data from the pre-pandemic fourth quarter of 2019 as a benchmark, Yu and Xu argued that economic growth in the first two quarters – despite being positive while those in other countries were negative – was lower than it should have been, signalling that the government must make changes.
Yu, a former central bank adviser, has long supported the use of fiscal spending as a tool to stabilise the economy.
Aside from the Ministry of Finance’s data, China’s state planner – the National Development and Reform Commission – approved fewer projects in the first six months of the year, compared with last year. It signed off on 40 projects worth 246.4 billion yuan (US$38 billion), versus 54 projects worth 494.4 billion yuan in the first half of 2020.
The country’s infrastructure investment, which is mainly funded by government spending and borrowing from state-owned banks, grew only 7.8 per cent in the first six months of 2021, lagging behind overall fixed-asset investment growth of 12.6 per cent, government data showed.
For its part, the finance ministry has remained tight-lipped over any further fiscal loosening, as it has vowed to tackle considerable implicit liabilities and ensure fiscal sustainability.
“The key is determining how to strike a balance between public risks and fiscal risks,” Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, said at a forum last week.
Beijing normally caps its fiscal-deficit ratio – the difference between income and expenditure – at 3 per cent. But it allowed the ratio to rise to 3.7 per cent in 2020 and set a 3.2 per cent target for this year.
Furthermore, even though overall government debt was only 44.5 per cent of the gross domestic product at the end of March, many analysts say there is more debt than has been acknowledged.
Some policy changes have already started, in line with the State Council’s “cross-cycle adjustments” to better deal with “potential cyclical risks”, according to assessments at an economic symposium involving analysts and entrepreneurs last week.
Liu Yuanchun, vice-president of Renmin University, noted that China is at a critical juncture in terms of recovering demand and should not allow its hands to be tied. Instead, Liu said, sufficient investment funds should be guaranteed for projects in the second half of the year.
“We must have a dynamic adjustment of fiscal policies to align with the economic recovery and fiscal revenue growth,” he said in an article published on Sina.com.