Coronavirus: China to raise fiscal deficit ratio after G20 pledges US$5 trillion economic rescue package

President Xi Jinping said on Friday China would step up efforts to stimulate the economy by raising the fiscal deficit ratio and selling special government bonds, a day after the G20 pledged to do “whatever it takes” to help protect global growth from the coronavirus pandemic.

Speaking at a Politburo meeting, Xi said that China was working on “a package of macroeconomic policies” to propel growth in the world’s second biggest economy, which is in danger of suffering its first contraction this quarter since 1976.

“The fiscal policy will be more proactive and forceful, while the prudent monetary policy will be more flexible,” he said, according to the official Xinhua News Agency. “We will raise the fiscal deficit ratio and issue special treasury bonds, in addition to an expansion of local government special purpose bond issuance.”

The comments make clear that China will go further to aid growth and is ready to budget a fiscal deficit above 3 per cent of gross domestic product in 2020, although the president did not give any specific numbers.

China’s turn to a more aggressive pro-growth stance comes as the coronavirus, which has infected more than half a million people across the world, weighs heavily on the global economy and on China’s exports.

Xi said China’s value chains were facing “new challenges” as the pandemic hit the global economy.

The China International Capital Corporation (CICC), China’s most prominent investment bank, lowered its growth forecast for China this year to only 2.6 per cent, well below its previous projection of 6.1 per cent.

With a global recession all but assured, the Group of 20 (G20) major economies put aside simmering political tensions to gather for an emergency virtual summit on Thursday, where they pledged to do “whatever it takes” to overcome the coronavirus pandemic.

In their closing statement, the leaders agreed to pump US$5 trillion into the world economy as part of a global economic rescue package.

China’s foreign ministry spokesman Geng Shuang said earlier on Friday that China had already contributed US$344.1 billion in form of fiscal and monetary policies to the plan, underlining that Beijing is still in favour of a measured approach to help economic growth, instead of adopting the all-in stimulus of the United States.

Washington has announced a US$2 trillion virus package and the US Federal Reserve has embarked on unprecedented easing.

The brief show of unity on Thursday was welcomed by many, but analysts said the G20 communique did not adequately address the crisis, and that collaboration to fight the virus would be hampered by rising barriers to trade and the movement of people.

“The whole point of cooperation is to increase the benefit most from the spillover [effect],” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis. “It’s not about how much you have put together but for example, eliminating export bans for medical materials.”

The G20 meeting came amid a surge in export controls over medical equipment and food.

The European Union was among those banning the export of vital medical equipment, while Russia put controls on overseas shipments of processed grains and Vietnam cancelled export contracts for rice.

Trade watchers have criticised these controls as being counterproductive to a global recovery, while a report by Chad Bown at the Peterson Institute of International Economics called for them to be removed.

“Hopefully, governments may now feel less pressure to erect new trade barriers – including the self-defeating export restrictions by the European Union and others now spreading like wildfire,” Bown wrote, in a study welcoming the influx of Chinese medical goods to the rest of the world.

“Trade protectionism – whether it curbs imports or exports or applies ‘Buy Local’ regulations to purchases made by hospitals – will strangle essential supply queues, raise prices, and cost lives.”

The US$5 trillion package agreed to by the G20 will be disbursed through targeted fiscal policy and insurance schemes. The closing statement said members would look to increase funding for multilateral bodies to fight the outbreak. Trade ministers and central bank governors were also urged to coordinate their policy responses.

The G20 summit took place against the backdrop of a bitter US-China verbal confrontation over the origin of the coronavirus, and an oil price war between Russia and G20 host country Saudi Arabia.

While Xi and US President Donald Trump sought to de-escalate the war of words, there was no indication Saudi Arabia and Russia had done anything to patch up their oil price dispute.

The communique did not include any details on the global co-ordination desperately needed to fight the economic damage from the outbreak, analysts said.

Jingyi Pan, markets strategist at broker IG, said the US$5 trillion stimulus pledge would contribute to short term needs.

“It may be a preliminary estimation of the amount governments around the world are committing, including the latest US$2 trillion from the US,” Pan said.

In 2008 and 2009, G20 nations agreed to a US$4 trillion package to revive their economies.

China announced its own massive stimulus package with a price tag of 4 trillion yuan (US$564 billion), in combination with a flood of easy credit. A decade later, China is still dealing with the hangover of debts and excessive capacity in many industries.