China pursues austerity with first fiscal gap cutback since 2023

[BEIJING] China narrowed its cumulative fiscal deficit for the first time in more than two years, pressing ahead with austerity despite muted domestic demand and slowing economic growth.

The combined shortfall under China’s two biggest government budgets shrank 4.1 per cent in the first five months from the same period a year earlier to 3.2 trillion yuan (S$611 billion), according to Bloomberg calculations based on data released by the Ministry of Finance late on Monday (Jun 22).

In May alone, government expenditure fell 3.9 per cent year on year, marking the third consecutive month of decline. Total spending under the two accounts fell 0.3 per cent in January to May, even as broad income climbed 0.8 per cent.

“Fiscal policy has become less supportive of growth in the second quarter versus the first, on the back of falling land sales revenue and shrinking policy bank support,” Goldman Sachs economists, including Lisheng Wang, said in a report.

But given strong exports and this year’s modest growth target, “we do not expect significant, broad-based stimulus in the near term”, they added.

The fiscal choices made by China come at the expense of economic growth, with consumer spending and investment dropping to levels unseen since the Covid-19 pandemic.

Exports are benefiting from a global artificial intelligence boom, however, reducing the urgency for stimulus to offset weak domestic demand.

Goldman’s economists have downgraded their forecast for China’s growth in the third quarter from 4.7 to 4.5 per cent, which is at the bottom end of the government’s target for this year’s annual expansion.

Government expenditure could pick up in the coming months as China rolls out plans to spend more than seven trillion yuan this year to invest in infrastructure, including a network of computing hubs.

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For now, infrastructure-related expenditure is in decline, decreasing 12 per cent on year in May after an 18 per cent slump in the previous month, Bloomberg calculations based on the official numbers showed.

The property downturn remained a drag on government revenue, with income from land sales tumbling nearly 36 per cent last month, marking its eighth straight month of double-digit decline.

Tax revenue, however, rose 6.8 per cent in the month, taking its increase to 4.4 per cent in the January-to-May period.

Authorities have been strengthening the collection of taxes as they target overseas capital gains and other foreign income.

A rebound in factory inflation may also have helped improve fiscal revenue by boosting taxes, according to Goldman.

Lynn Song, chief economist for Greater China at ING Bank, said that a government-led investment rebound is possible in the second half of the year.

Even so, he pointed out that “it’s still quite uncertain if this will be enough to offset the decline in private investment”.

“Given the weak domestic indicators the last few months, there could be pressure to speed up the pace to ensure this year’s growth remains within target,” he added. BLOOMBERG