BOFIT Viikkokatsaus / BOFIT Weekly Review 2019/10

At the opening of the National People’s Congress (NPC) on Tuesday (Mar. 5), premier Li Keqiang presented the governmental work report and goals for this year to the nearly 3,000 NPC representatives. Li noted that, while economic conditions were challenging, the government was still committed to an ambitious GDP growth target of 6.0–6.5 %. The NPC delegates should formally approve the target with little debate.

To help the government reach its growth targets, the easing of fiscal and monetary policy will continue. Taxes and fees are planned to be cut by nearly 2 trillion yuan (300 billion dollars). The cuts include a reduction in the VAT rate from 16 % to 13 % for manufacturing firms, a cut in the VAT rate from 10 % to 9 % for construction and transport firms, as well as lower employer contributions to social security and lower rates for electricity and data transmission. Despite significantly larger revenue cuts than last year, the government still expects the budget deficit to only amount to 2.8 % of GDP.

To finance infrastructure projects, local governments have been granted permission to issue 2.15 trillion yuan (320 billion dollars) in special purpose bonds. Last year’s budget capped special purpose bond issuance at 1.35 trillion yuan. China does not treat special purpose bonds as public debt because the projects as planned should be self-financing. Media reports say the working agenda mentions possible reductions in interest rates and reserve requirements, as well as significant increases in bank lending, especially to small firms.

As in last year, the government expects inflation to be 3 %, while urban unemployment holds at about 5.5 %. In addition, one of the goals is to raise another 10 million Chinese out of poverty as in earlier years.

While governmental work agenda’s remarks on the difficult economic situation are hard to dispute, the targets set for economic growth, budget and gaining control over indebtedness raise serious doubts. China continues to obsess on GDP growth targets that lead to fabrication of statistical data and excessive debt levels. Despite a 2018 budget deficit target of 2.6 % of GDP, the realised official budget deficit exceeded 4 %. Many observers believe the actual deficit was at least double that. If the deterioration of economic conditions this year, large revenue cuts and large spending increases are included, it seems certain that the budget deficit will rise. In addition, plans to increase corporate borrowing regardless the risks will further aggravate the debt problem.

Official growth targets have distorted economic policy throughout the current decade, increasing the country’s vulnerability to economic shocks. The current economic policies hardly match the image of China as a country with a strong long-term strategic view.

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