China’s ‘two sessions’: leaders must decide whether to scale back economic stimulus as other risks loom


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China’s political elite will face a number of challenges when they gather in Beijing next month for the year’s biggest legislative set piece – the meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference, informally known as the “two sessions”. In this latest part of a series looking at the key items on the agenda, we examine the country’s debt risks associated with last year’s stimulus spending.

China is expected to scale back the coronavirus fiscal stimulus measures it enacted last year, as brighter economic prospects and hopes of improved relations with the United States help shift the government’s attention to domestic debt risks.

At the upcoming session of the country’s top legislature, the National People’s Congress (NPC), leaders are expected to adjust fiscal support for the economy by reducing both the budget deficit and the issuance of local special purpose bonds used to fund infrastructure spending, while increasing the budget for livelihood-related projects, according to analysts.

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Meanwhile, there has been heated debate in recent months as to whether China should resume its decades-long tradition of setting an annual gross domestic product (GDP) target, given uncertainty about the domestic and global economic outlook.

Scaling back economic stimulus would align with the central government’s call for balancing development and security over the next 15 years, with efforts focused on curbing “grey rhino” risks that could threaten the stability of China’s financial system and the nation’s economic development.

We must make reasonable arrangements for the fiscal deficit, debt and expenditure policies, and we must take substantial actions to solve local implicit debt risks
Liu Kun, finance minister

“The emergency measures adopted last year have significantly amplified China’s debt risks,” said Wen Laicheng, a professor of fiscal science at the Central University of Finance and Economics in Beijing. “In particular, the local government debt ratio has jumped to an average of 90 per cent [of local GDP], which is close to the red line.”

The world’s second-largest economy rolled out trillions of yuan worth of economic relief last year, including the rare issuance of 1 trillion yuan (US$154.6 billion) in special treasury bonds and 3.75 trillion yuan worth of local special purpose bonds to help curb the impact of the coronavirus pandemic and save hard-hit businesses.

Lowering the fiscal deficit ratio to 3 per cent of GDP from last year’s 3.6 per cent and reducing the size of local special purpose bonds would send a clear signal that China is returning to a more normal fiscal policy, Wen said.

“Judging from government circulars, implicit liabilities remain a big concern,” he added.

Total Chinese government debt totalled 46.55 trillion yuan (US$7.2 trillion) at the end of last year, including 20.89 trillion owed by the central government and 25.66 trillion yuan owed by local authorities.

The debt load is equivalent to 45.8 per cent of last year’s GDP – below the 60 per cent of GDP that is considered a warning line by international institutions – but the official debt figure underestimates total government liabilities, as it does not include hidden debts and contingency liabilities buried in state firms or public-private partnership projects.

Most analysts expect Beijing to set an economic growth target of around 6 per cent for this year, but others argue that policymakers are likely to skip setting a numeric goal for the second consecutive year.

Ma Jun, a member of the monetary policy committee of the People’s Bank of China (PBOC), the nation’s central bank, argued in a public forum last month that China should permanently stop setting annual economic growth targets, as its overall level of borrowing and debt is rising at the fastest rate since 2009.

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If Beijing does set a GDP target, it will be announced in the government’s Work Report that Premier Li Keqiang will read on March 5 during the first day of the NPC meeting.

The growth target has long been one of the most closely watched indicators of Beijing’s economic policy intentions in the year ahead.

Xu Hongcai, deputy director of the economic policy commission under the China Association of Policy Science, said that the government is likely to resume the tradition and set a target of about 6 per cent for this year.

“The reason is simple – because it is expected that [the economic growth rate] may be more than 8 per cent this year, so [achieving] 6 per cent is no problem,” he told the Post.

His view was echoed by Li Yang, a senior economic adviser to the Chinese leadership and the head of the National Institute for Finance and Development, an official think tank. He pointed to local economic growth targets announced in recent days by the most economically developed regions –Guangdong, Shanghai, Jiangsu and Zhejiang – as evidence.

“Given that, it can be very clearly concluded that the national growth rate should be around 6 per cent,” he told an online forum on Wednesday.

All 31 Chinese provincial-level jurisdictions have released their own economic growth targets for 2021, with the goals for most regions being over 6 per cent. The highest ones were released by Hubei and Hainan provinces, which were both more than 10 per cent.

China’s economy grew by 2.3 per cent in 2020, the lowest rate since 1976, but the only expansion among the world’s major economies. The International Monetary Fund projected last month that the Chinese economy would grow by 7.9 per cent this year.

We expect a moderate fiscal consolidation in 2021, to ensure fiscal sustainability while averting a policy cliff
Standard Chartered Bank

At December’s central economic work conference, a meeting of top economic officials to outline this year’s economic targets, Chinese leaders called for making fiscal policy more effective and sustainable, while pledging to continue necessary government support for the economic recovery this year.

And Finance Minister Liu Kun stressed last month that China must tighten its belt and maintain sufficient leeway to address future risks. “We must make reasonable arrangements for the fiscal deficit, debt and expenditure policies, and we must take substantial actions to solve local implicit debt risks,” the official Xinhua News Agency quoted him as saying.

The finance ministry launched an online platform last week to register a variety of local debt information, including outstanding size, economic indicators and fiscal strength. It also ordered officials to “look through” how special purpose bond proceeds are being spent at the local level.

Former finance minister Lou Jiwei earlier warned that debt difficulties would continue for some time, as Beijing has maintained a “proactive” fiscal policy for 12 straight years, starting with the 4 trillion yuan stimulus package enacted in 2008 to counter the impact of the global financial crisis.

“Government debt will increasingly become a threat to future fiscal stability and economic security,” the outspoken government adviser said at a forum in December.

Debt interest payments alone have posed a heavy burden, accounting for 13 per cent of central government expenditures in 2019, before the implementation of coronavirus relief measures. Lou estimated that the figure rose to about 15 per cent last year.

The former minister proposed curbing the size of local special purpose bonds, which are not included in the calculation of the legislature-approved budget deficit ratio.

China’s augmented fiscal stance – a combination of the general public budget and the government funds budget – reached 8.7 trillion yuan (US$1.35 trillion) last year, or 8.6 per cent of GDP, according to an estimate by Standard Chartered Bank.

China debt: how big is it and who owns it?

The broad budget deficit ratio is expected to be lowered to about 6 per cent this year, which is still higher than the 5.6 per cent limit set in 2019.

Local governments had cash holdings of almost 2 trillion yuan at the start of this year, which diminished the urgency of further government bond issuances. “We expect a moderate fiscal consolidation in 2021, to ensure fiscal sustainability while averting a policy cliff,” the bank said.

Shen Jianguang, chief economist at JD Technology, said weak local government financial conditions are the biggest concern for policymakers, given high debt levels and falling tax and land-sale revenue.

However, the central government is likely to continue giving local governments direct financial support, which totalled more than 1.5 trillion yuan last year, and fiscal revenue could rebound as the national economy is projected to grow around 8 per cent this year, he added.

“In the latest government push to boost domestic demand, government officials have highlighted projects to improve livelihoods, such as education as well as health and elderly care,” Shen said.

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