BOFIT Viikkokatsaus / BOFIT Weekly 2019/02

The slowdown in economic growth has forced China’s top decision-makers to implement further stimulus measures on the fiscal front. The budget deficit will be raised and local governments given access to additional off-budget debt financing.

According to media reports, China plans to raise this year’s budget deficit target at the March meeting of the National People’s Congress from last year’s 2.6 % to 2.8 % of GDP. Much of the burgeoning deficit is due to increased budget spending on stimulus measures and tax cuts. Official figures for realised public sector budget deficits in recent years have been running in the range of 3–4 % of GDP, while the IMF estimates that China’s actual budget deficit is somewhere around 10 % of GDP. Public sector debt is currently estimated to be around 70 % of GDP, so additional debt-fuelled stimulus carries serious risks.

As part of the stimulus programme, local governments will be allowed to increase the amount of bond issues and accelerate their timing so that construction of infrastructure projects can get underway and support economic growth. The South China Morning Post reports that local governments have already been granted permission to issue new bonds with a total value of 1.39 trillion yuan (200 billion dollars). The value of the total bond quota this year is estimated to rise to about 3 trillion yuan (up from 2.18 trillion yuan last year). Most of these local government bonds are “special purpose bonds,” where repayment of the bond is based on revenue generated by the financed project’s profits. Such projects and their financing are not included in local government budgets. The remainder of the bond quota consists bonds meant for normal budget financing.

Due to worsening debt problems, it is unclear whether commercial banks have any appetite for further increasing their local government bond portfolios. The unwillingness reflects the large number of projects financed with special bonds that have failed to generate enough revenue to pay back the bond. As economic growth slows, such problems are likely to increase.