China’s slowing economic growth and potential headwinds may suggest fiscal loosening is imminent

China’s slowing investment approvals and lower-than-expected pace of government spending have fuelled debate over whether the country should be ramping up fiscal spending, particularly as economic growth looks to wane in the coming years.

In the first six months of this year, China’s fiscal expenditure rose 4.5 per cent from a year earlier to 12.2 trillion yuan (US$1.88 trillion), accounting for 49 per cent of the annual budgeted total. In comparison, revenue, which rose 21.5 per cent, already reached 59 per cent of the year’s budgeted income, data from the Ministry of Finance showed on Tuesday.

Meanwhile, only 1.01 trillion yuan worth of special-purpose government bonds were sold in the January-June period, or 28 per cent of the full-year expected total, according to data compiled by debt-clearing house ChinaBond.

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The fiscal consolidation was accompanied by slower project approval and infrastructure investment.

Concerned analysts say there needs to be a further loosening of China’s fiscal policies to offset potential headwinds, including sluggish retail consumption; struggling small and medium-sized enterprises; and potentially slowing exports.

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“Although China has beaten the pandemic and has led the world in terms of economic recovery, the national economy has failed to reverse its slowing trend since 2010,” said a statement released at the weekend by Chinese Academy of Social Sciences researchers Yu Yongding and Xu Qiyuan.

The debate has ratcheted up ahead of next week’s quarterly economic-assessment conference of the Politburo, the centre of power within the Communist Party. Many analysts believe a reset in policy tone towards fiscal loosening is imminent. Last week, China posted second-quarter economic growth of 7.9 per cent, down from 18.3 per cent a quarter earlier.

China has set an economic growth target of “above 6 per cent” for 2021, after growing by 2.3 per cent last year. But while most analysts are still expecting China’s economic growth to extend beyond 6 per cent for the year, there have been growing signs of economic instability, especially amid the Chinese government’s preoccupation with rising commodity prices and with potential financial spillover from the US Federal Reserve’s future monetary tightening.

Using economic data from the pre-pandemic fourth quarter of 2019 as a benchmark, Yu and Xu argued that economic growth in the first two quarters – despite being positive while those in other countries were negative – was lower than it should have been, signalling that the government must make changes.

Yu, a former central bank adviser, has long supported the use of fiscal spending as a tool to stabilise the economy.

Aside from the Ministry of Finance’s data, China’s state planner – the National Development and Reform Commission – approved fewer projects in the first six months of the year, compared with last year. It signed off on 40 projects worth 246.4 billion yuan (US$38 billion), versus 54 projects worth 494.4 billion yuan in the first half of 2020.

The country’s infrastructure investment, which is mainly funded by government spending and borrowing from state-owned banks, grew only 7.8 per cent in the first six months of 2021, lagging behind overall fixed-asset investment growth of 12.6 per cent, government data showed.

For its part, the finance ministry has remained tight-lipped over any further fiscal loosening, as it has vowed to tackle considerable implicit liabilities and ensure fiscal sustainability.

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“The key is determining how to strike a balance between public risks and fiscal risks,” Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, said at a forum last week.

Beijing normally caps its fiscal-deficit ratio – the difference between income and expenditure – at 3 per cent. But it allowed the ratio to rise to 3.7 per cent in 2020 and set a 3.2 per cent target for this year.

It does not help that Beijing has become more wary of using bigger fiscal moves after sending its deficit ratio into the red during the US-China trade war spanning 2018 and 2019.

So far, the biggest move in recent weeks came when the People’s Bank of China cut the reserve requirement ratio, injecting an additional 1 trillion yuan into the interbank system. But no further loosening moves have yet been flagged.

We must have a dynamic adjustment of fiscal policies to align with the economic recovery and fiscal revenue growth
Liu Yuanchun, Renmin University

Furthermore, even though overall government debt was only 44.5 per cent of the gross domestic product at the end of March, many analysts say there is more debt than has been acknowledged.

Some policy changes have already started, in line with the State Council’s “cross-cycle adjustments” to better deal with “potential cyclical risks”, according to assessments at an economic symposium involving analysts and entrepreneurs last week.

Liu Yuanchun, vice-president of Renmin University, noted that China is at a critical juncture in terms of recovering demand and should not allow its hands to be tied. Instead, Liu said, sufficient investment funds should be guaranteed for projects in the second half of the year.

“We must have a dynamic adjustment of fiscal policies to align with the economic recovery and fiscal revenue growth,” he said in an article published on

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