Rise in deficit spending, stable growth forecast for 2017

The Chinese government is expected to increase deficit spending in 2017 to cope with economic headwinds and keep GDP growth at a stable 6.5 percent, market analysts said.

The growth rate forecast and assurance that no economic hard landing will occur were released on Monday in a book from a top think tank. It also forecast that consumer inflation will rise moderately to 2.2 percent, according to the Chinese Academy of Social Sciences.

The forecasts came after the tone-setting Central Economic Work Conference, held on Thursday in Beijing, suggested that China also will deepen reform on the supply side, and the government will tend to maintain an expansionist fiscal policy and moderate monetary policy next year.

Governments typically use spending as part of their fiscal policy to stimulate economies. Monetary policy often involves use of interest rates to stimulate or rein in an economy.

Zhao Yang, chief China economist at Nomura International (HongKong) Ltd, said a 6.5 percent GDP growth rate next year would be within the market’s expectations and also adequate for reaching the government’s goal of doubling the 2010 GDP and people’s incomes by 2020.

Nomura expects reported GDP growth to moderate in 2017 to 6.5 percent and in 2018 to 6.2 percent from an estimated 6.7 percent in 2016.

Zhao said the government will need to use deficit spending to boost infrastructure investment and fiscal expan- sion. That would be implemented through relatively large budget deficits, estimated at 3.5 to 4 percent of GDP, and more quasi-fiscal supports. Such supports could involve financing by the big, Stateowned “policy” banks and public-private partnerships to support infrastructure projects, as well as greater local government bond issuance.

“The government still has enough ammunition to stimulate investment growth, although such measures will lead to a poorer quality of growth,” Zhao said.

The economy’s soft landing and mildly higher inflation in 2017 will be the result of a fiscal stimulus and delayed effects of yuan depreciation, Zhao said.

Standard Chartered expects political, economic and social stability to be given high priority and the government to set a growth target within the range of 6.5 to 7.0 percent for 2017.

Ding Shuang, head ofGreater China Economic Research at Standard Chartered Bank (HK) Ltd, pointed out that as leveraging rises, there could be an increase in risks, though that is difficult to predict. Ding also said additional concerns include some cooling in the property market next year, a continuation of capital outflow risk, and the uncertainties presented by the policies of US president-elect Donald Trump.

Many institutions expect at most one reserve requirement ratio cut for banks but no interest rate cuts in 2017.

The government still has enough ammunition to stimulate investment growth.” Zhao Yang, chief China economist at Nomura International (Hong Kong) Ltd