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China seen keeping its deep pockets open to prop up the economy

Monday, September 19, 2016 - 07:08
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China is seen keeping its deep pockets open in the second half and through 2017, despite having front-loaded spending earlier this year, as fiscal policy takes over from broad monetary easing as the major prop to growth.

[BEIJING] China is seen keeping its deep pockets open in the second half and through 2017, despite having front-loaded spending earlier this year, as fiscal policy takes over from broad monetary easing as the major prop to growth.

The central government's fiscal deficit will surpass the target of 3 per cent of gross domestic product set for 2016, according to economists surveyed by Bloomberg News.

The broader shortfall that wraps in revenues from land sales, policy banks and other channels will also sink deeper into the red.

17 economists expect this year's budget deficit will be deeper than the government forecast, with nine forecasting 3.6 to 4 per cent and four projecting above 4 per cent. 16 expect the broader augmented fiscal deficit will be 10 per cent of GDP or more. 16 expect a higher fiscal deficit next year too, with nine forecasting 3.5 to 3.9 per cent, 6 seeing 3.1 to 3.4 per cent, and one expecting 4 to 4.5 per cent of GDP.

The fiscal tap is seen remaining well and truly open, in part to compensate for an on-hold monetary stance as policy makers shift from all out stimulus to reigning in asset bubbles.

"The Chinese authorities have become more cautious with regard to monetary policy, given the prevailing issues around capital flows and exchange rate uncertainty," said Arjen van Dijkhuizen, senior economist at ABN Amro Bank NV in Amsterdam.

"The shift in focus from monetary to fiscal stimulus is in line with the policy recommendations of G20, which China is chairing this year."

The latest budget numbers set the pattern: Fiscal expenditure jumped 10.3 per cent in August from a year earlier, while revenue rose just 1.7 per cent. The economy has stabilised on the back of such support, with factory output, investment and retail sales all exceeding economist estimates last month.

China's government traditionally accumulates revenue early in the year, then splurges late in the year. In 2016, it has already spent 594 billion yuan (S$121.7 billion) more than it reaped in the first eight months of this year, according to Bloomberg calculations.

Yet the official central budget is just the tip of the iceberg. The International Monetary Fund estimates China's augmented fiscal deficit at 10.1 per cent of GDP this year. That stealth ammunition includes money channelled to its policy lenders, who have amassed at least 2 trillion yuan in new financing for lending this year.

The economy is also getting a boost from land sales as the property boom helps local authorities' fund infrastructure projects. They're also issuing bonds to repay costlier bank credit and finance new expenditure.

To be sure, some economists expect some moderation. Zhu Haibin, chief China economist at JPMorgan Chase & Co in Hong Kong, expects fiscal support to be "slightly less forceful" in the second half of the year.

The hope is there'll be less off- budget and opaque stimulus, and an expansion of the official deficit, which is more transparent and subject to scrutiny.

"To make fiscal policy more sustainable, China needs to gradually reduce the augmented fiscal deficit while increasing the budgeted deficit," Mr Zhu said.

"That's our forecast, and that's also what we hope the nation will do."

BLOOMBERG