More expansionary fiscal policy expected next year

Release time:2023-12-05 Publisher:South Asia Development

China can adopt a more expansionary fiscal policy next year to underpin economic recovery amid multiple challenges including the downturn in the property market and stress from local government debts, experts said on Monday.

They suggested that the budgeted fiscal deficit rate next year should exceed the so-called red line of 3 percent, which China has retained for years, and could even reach 4 percent.

They made the remarks ahead of the Central Economic Work Conference, which is usually convened every December to map out economic development priorities and set the tone for macroeconomic policy next year.

"After disruptions caused by COVID-19 in the past three years, lack of funds has become a problem for households, enterprises and the government," said Zhang Yansheng, chief researcher at the China Center for International Economic Exchanges.

"Even if the debt-to-GDP ratio next year reaches 3.8 percent, we can hardly view that as 'stimulus', because that's what we need minimally to let households, enterprises and local governments have adequate funds and boost market confidence," Zhang added.

China set the budgeted fiscal deficit rate at 3 percent for 2023. Since 2008, the country's budgeted fiscal deficit rate has seldom exceeded 3 percent, except in 2020 when it was 3.6 percent and in 2021 with 3.2 percent.

The country decided to issue additional treasury bonds of 1 trillion yuan ($140 billion) in late October amid mixed economic data, raising the fiscal deficit rate to 3.8 percent for 2023, a record high.

Luo Zhiheng, chief economist at Yuekai Securities, said it is sensible for the central government to shoulder more debt and then transfer the funds raised to local governments, as the latter are under pressure to balance revenues and expenditures while preventing and defusing debt risks.

"It is highly necessary to allow the budgeted fiscal deficit rate for 2024 to exceed 3 percent and even reach 4 percent, given that the economic recovery lacks a solid foundation and the confidence of market entities needs a boost," Luo said.

He suggested allocating more fiscal resources to stimulate consumption rather than investment, after expanding the fiscal deficit rate next year.

China's economy will likely expand at a rate of 5 percent next year, under the premise of adopting an expansionary fiscal policy, improving coordination between fiscal and monetary policies, and further optimizing real estate measures, he said.

Pan Gongsheng, governor of the People's Bank of China, the country's central bank, said the central bank will strengthen coordination with fiscal policy and continuously beef up support for major national strategies, key areas and weak links.

It will provide low cost medium-to-long-term funding to affordable housing projects and make full use of structural monetary policy tools to beef up support for small and micro businesses, green development and technological innovation, Pan said on Saturday in an interview with Xinhua News Agency.

Feng Lin, a senior analyst at Golden Credit Ratings, said the fiscal deficit rate will stand around 3.5 percent next year, as stronger macroeconomic policies are expected to stabilize the economy.

She said that the issuance of special-purpose local government bonds, a key funding source of infrastructure investment that is usually not included in fiscal deficit, will likely be of similar scale as this year — about 3.8 trillion yuan to 4 trillion yuan.

Experts have also called for better management of risks stemming from hidden debts of local governments raised by their funding vehicles and the real estate downturn.

Sherry Zhao, senior director of Asia-Pacific International Public Finance Ratings at Fitch Ratings, said that extra financing obtained through accelerated special refinancing bond issuance has increased local government funding vehicles' available fiscal resources and could improve investor confidence in government support to hidden debts.

However, the additional debt issued will add to local governments' fast debt growth, especially for fiscally weaker regions, she said.

Louise Loo, lead economist at Oxford Economics, said that the housing market correction process is a much needed one, and probably still has two to three years more to run.

"We think ensuring credit supply to larger property developers to support project completions could help. Stabilizing the property sector and reducing housing inventories will require further policies to stimulate demand," Loo said.