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China flags room to boost government debt to support growth
[BEIJING] China's government still has room to borrow more to finance the investment and construction that's needed to shore up economic growth, the Ministry of Finance said.
Overall risks associated with government debt, which amounted to 26.66 trillion yuan (S$5.6 trillion) at the end of last year, are under control, the ministry said in a statement late on Thursday. The government can add leverage gradually because its debt ratio is still below international warning levels, it said.
"The statement appears to say they have more room to leverage the government balance sheet to help the corporate sector to deleverage," according to Ding Shuang, head of greater China economic research at Standard Chartered Plc in Hong Kong.
"On balance, it gives me the impression they are ready to run a more expansionary fiscal policy."
China's leaders are seeking to add fiscal firepower to underpin a slowing economy and clear the path for structural reforms including cutting overcapacity in sectors like coal and steel. With the nation's total debt already about two and a half times economic output, policy makers face a tricky balancing act: further leveraging risks undermining long-term stability, while a sharp credit contraction risks derailing growth and stability.
The current budget deficit target is 3 per cent of gross domestic product this year. Mr Ding estimates the actual level will be close to 4 per cent, and could run even higher if needed.
While debt concerns have shaken investor confidence, the ratio of government borrowings to GDP is low by global standards - 39.4 per cent, according to the finance ministry.
It's a different story for cash-strapped local governments. Their debt-to-GDP ratio was 89.2 per cent. China is accelerating debt-for-bond swaps for those administrations to ease the burden of repayments.
In its statement, the finance ministry said local governments' ability to repay debt has weakened and urged them to control the size of their debt.
The debt-swap mechanism allows local governments to convert debt to low-interest bonds with longer maturities. The ministry said 3.2 trillion yuan of loans were exchanged last year, and Finance Minister Lou Jiwei said in March that about 5 trillion yuan of such borrowings are maturing this year.
China deems it alarming when local government debt accounts for more than 100 per cent of the local economy, according to a report published by the National People's Congress last year. More than 100 cities and 400 counties across the country had seen their debt exceeding that line, the legislative body said.
The note from the finance ministry aims to "stabilize the economy amid restructuring and to underpin growth," according to a note from Ming Ming, head of fixed-income research at Citic Securities Co in Beijing, who said the essential part of deleveraging is to reduce corporate debt.
"Raising the government's leverage, especially the central government's, is an important way to ease high corporate debt."