China's fis­cal in­come to slow but room for more govern­ment debt

The Pak Banker - - 6BUSINESS -

BEI­JING: Growth in China's fis­cal in­come will slow in fu­ture, but the coun­try still has room to in­crease govern­ment debt, Fi­nance Min­is­ter Lou Ji­wei said in Bei­jing on Mon­day. China could mod­er­ately in­crease its fis­cal deficit ra­tio to gross do­mes­tic prod­uct (GDP), al­though not by too much, Lou Ji­wei said at a news con­fer­ence dur­ing the an­nual ses­sion of par­lia­ment. "Our fis­cal in­come is in a se­vere sit­u­a­tion. We need to ex­pand the fis­cal deficit, but it is hard to say how much room is ap­pro­pri­ate," Lou said.

"We have some room, but can­not in­crease too much," added, not­ing that China's fis­cal in­come ac­counts for around 30 per­cent of GDP, "which is rel­a­tively low com­pared with other coun­tries and far lower than that in de­vel­oped coun­tries."

China has bud­geted a 2016 deficit of 3 per­cent of gross do­mes­tic prod­uct, the fi­nance min­istry said on Satur­day, com­pared with an ac­tual fis­cal deficit ra­tio of 2.4 per­cent in 2015.

Some an­a­lysts say that tar­get is too con­ser­va­tive to ac­tu­ally sta­bi­lize slid­ing eco­nomic growth, while oth­ers warn of the im­pact it could have on the govern­ment's bal­ance sheet.

"This points to a fur­ther in­crease in lev­er­age in the econ­omy which risks rais­ing con­tin­gent li­a­bil­i­ties for the govern­ment," said Marie Diron, a se­nior vice pres­i­dent at Moody's in emailed com­ments on the new deficit tar­get.

Moody's down­graded its out­look on Chi­nese govern­ment debt to "neg­a­tive" from "sta­ble" on Wed­nes­day, cit­ing un­cer­tainty over au­thor­i­ties' ca­pac­ity to im­ple­ment eco­nomic re­forms, ris­ing govern­ment debt and fall­ing re­serves. HSBC es­ti­mates cen­tral and lo­cal govern­ment bud­geted bond is­suance to­gether will in­crease by nearly 35 per­cent this year to 2.18 tril­lion yuan ($334.76 bil­lion). The 3 per­cent deficit tar­get dis­ap­pointed some an­a­lysts, who had hoped for more ag­gres­sive mea­sures to prop up growth in the world's se­cond-largest econ­omy.

How­ever, Chi­nese reg­u­la­tors have also said they will in­crease the ef­fi­ciency of govern­ment in­vest­ment, which would the­o­ret­i­cally pro­duce bet­ter eco­nomic gains with­out ag­gra­vat­ing China's al­ready mas­sive stock­pile of un­der­per­form­ing loans.

How­ever, whether cen­tral govern­ment has got­ten bet­ter at pre­cisely tar­get­ing lend­ing, as op­posed to spurring over­in­vest­ment in in­dus­tries seen as fa­vored by Bei­jing that re­sults in as­set bub­bles, is a ma­jor ques­tion. Lou said that if state-owned banks see prof­itabil­ity fall thanks to in­creased lev­els of non-per­form­ing loans, the fi­nance min­istry would give them "ap­pro­pri­ate help". But he de­nied this sup­port would con­sti­tute spe­cial treat­ment for banks in which the govern­ment is a ma­jor share­holder.

Chi­nese of­fi­cials are still in­cen­tivised to drive eco­nomic growth, and quick in­vest­ment projects in in­fra­struc­ture, air­ports or com­mer­cial real es­tate is gen­er­ally the eas­i­est way to do so, re­gard­less of whether the pro­ject ac­tu­ally meet a mar­ket need or not. "The longer the Chi­nese econ­omy con­tin­ues to add debt, the more risky we will per­ceive the sit­u­a­tion to be," said An­drew Colquhoun, head of Asia-Pa­cific sov­er­eign rat­ing at Fitch.

Cen­tral bank vice gov­er­nor Yi Gang said in a sep­a­rate con­fer­ence that he is con­fi­dent that China has ad­e­quate for­eign ex­change re­serves, point­ing out they are the largest in the world.

China's sharp draw­down of re­serves in re­cent months to al­le­vi­ate down­ward pres­sure on its yuan cur­rency have un­nerved global fi­nan­cial mar­kets, though it con­tin­ues to have the most re­serves in the world.

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