China’s economic slowdown is putting the spotlight back on fiscal stimulus -- but Beijing isn’t opening the spending taps just yet.
While the U.S. government is pushing to raise its debt ceiling and countries elsewhere keep fiscal policy loose to support their pandemic-hit economies, China could be on track for a much smaller budget deficit than targeted, or even its first balanced budget in about four decades.
The pullback wasn’t a big problem earlier in the year, when the economy was rebounding strongly, but with the economy now being hit from several sides, the lack of fiscal support has become a glaring issue.
Tighter fiscal policy is partly driven by Beijing’s push to cut wasteful spending and reduce debt among local governments in order to lower financial risks across the economy. On top of that, stress in the property market is curbing land sales, a key source of income for local governments, who are already facing revenue pressure from a slowing economy.
Here’s a deeper look at China’s fiscal situation and the implications for the economy:
Spending by the national and local governments was about 21.5 trillion yuan ($3.3 trillion) through the end of August, according to Ministry of Finance data, representing only about 56% of the target for the whole of this year, and unchanged from the same point last year.
The government forecast the deficit would shrink slightly this year to 3.6 trillion yuan, claiming in March that this showed China was “pursuing high-quality development rather than adopting a deluge of strong stimulus.”
The deficit target was decided at the start of the year when the economy was growing at close to its potential rate and it was appropriate for authorities to consider normalizing policy at the time, said Ding Shuang, chief China economist at Standard Chartered Plc.
“But what happened next was not expected by policy makers at the time, from the regulatory tightening to property curbs and natural disasters,” he said. “Fiscal policy will become stronger in the coming months, but it’s not like you can just make the instruction today and have the money spent overnight.”
When removing special local bonds and money carried over from last year, the budget deficit in the first eight months was only 1 trillion yuan, according to Bloomberg calculations, compared with a target for the whole year of almost 9 trillion yuan.
Local governments have been slower to sell bonds this year than they were last year, with fewer sales of both regular bonds and special bonds through the end of September compared with the same time last year. The special bonds are meant to pay for infrastructure spending, but local governments have struggled to find worthwhile projects to fund over the past few years.
“Local government special bond issuance has accelerated somewhat but remains below the pace needed to fully utilize this year’s quota,” Goldman Sachs Group Inc. economists wrote in a note last month.
The National Development and Reform Commission restarted approvals of infrastructure investment projects in August after a six month hiatus and it’s urging local governments to allocate more manpower and funds to accelerate the preparation of investment projects. Still, local governments must ensure they prevent debt risks, an NDRC official said at a press conference in September.
Recent difficulties in the property market due to China Evergrande Group’s debt crisis and controls on land prices make it harder for local governments to sell land to raise funds for projects. Government income earned from land sales declined in August compared to a year earlier, latest data showed.
If that continues for the rest of the year, it will be very damaging for local government finances, as land sales in the last four months of the year typically brings in about half of all revenue from that source for the whole year.
However, there are signals that more government spending may be in the works, with the State Council last month calling for efforts to better coordinate fiscal, financial and employment policies in order to “stabilize reasonable expectations by the market.”