China’s Slowing Revenue Gains Seen Limiting Spending
China’s government spent more than planned in the first nine months of the year, and revenue gains moderated, leaving little room for public outlays to stoke the economy this quarter without an expansion of the budget.
Fiscal revenue rose 10.9 percent in January-to-September from a year earlier to 9.06 trillion yuan ($1.5 trillion), compared with a 29.5 percent gain in the same period in 2011, Ministry of Finance data showed this month. Spending in the January-September period rose 21.1 percent, higher than the targeted 14.1 percent rise for the full year, leaving a surplus of about half last year’s level.
“The effects of China’s fiscal policy were expansionary in the first nine months but will be neutral in the fourth quarter as spending won’t be higher than a year earlier,” said Ding Shuang, senior China economist with Citigroup Inc. in Hong Kong, who formerly worked at the People’s Bank of China and International Monetary Fund. “Policy effects from previous months will ensure a modest recovery, but the rebound is restrained.”
Policy makers across Asia have restrained their stimulus efforts compared with 2008-2009 as the global expansion slowed, either opting to preserve firepower should Europe’s crisis worsen, or seeking to avoid asset-price bubbles. In China, outgoing Premier Wen Jiabao’s government has fought to rein in housing costs in the run-up to the nation’s once-in-a-decade leadership transition that starts next month.
The Finance Ministry had allocated 97 percent of the year’s budgeted funds for infrastructure spending by the end of September, the official Xinhua News Agency reported Oct. 23. In railways, for example, China boosted spending plans this year by about 25 percent to 516 billion yuan.
Shares of CSR Corp. (1766) and China CNR Corp. (601299), the nation’s two biggest train makers, advanced Oct. 23 after the Economic Information Daily, a Xinhua publication, reported 13 railway infrastructure projects were added to this year’s construction investment plans. The benchmark Shanghai Composite Index has declined 17 percent in the past year as the slowdown pares profits. The gauge was down 0.3 percent as of 1:14 p.m. local time.
The 2012 budget endorsed in March by China’s rubber-stamp National People’s Congress set a target deficit of 800 billion yuan and any change would require the legislature’s approval.
“The fiscal money left for spending in the coming months is actually very limited,” Song Guoqing, an academic adviser to the central bank and professor at Peking University, said in an Oct. 18 speech in Beijing. “That will put a question mark on whether the present economic recovery will be sustained.”
“The government can revise the budget if it really wants to,” Song said. “So far there is no sign that the budget will be altered this year.”
Data released this month suggest the worst is over for China’s growth slowdown. Factory production, retail sales and fixed-asset investment showed bigger-than-forecast gains in September, while industrial companies’ profits rose for the first time in six months. Five out of 25 economists surveyed in October forecast at least one lending-rate cut by year-end, down from 15 of 25 in September’s survey.
To be sure, this year’s allocation and spending of funds won’t necessarily constrain the ability of a government with $3.3 trillion in foreign-exchange reserves to stimulate the economy. China had outstanding treasury debt of 7.2 trillion yuan at the end of 2011, or about 15 percent of GDP.
“Most of the infrastructure investment is not financed explicitly by fiscal resources or on the budget but through other means,” said Wang Tao, chief China economist at UBS AG in Hong Kong. Bank lending and bond sales are the main financing channels, she said.
After Wen announced a 4 trillion-yuan stimulus package during the global financial crisis in 2008, the central government provided 1.18 trillion yuan, leaving local governments to borrow other funds. Banks provided 9.6 trillion yuan of new loans in 2009 and 7.95 trillion yuan in 2010.
Loans totaling about 8.5 trillion yuan this year, along with expanded bond issuance and borrowing through trust companies, will help the economy grow 8.3 percent in 2013, said Joy Yang, chief Greater China economist at Mirae Asset Securities (HK) Ltd. in Hong Kong, who previously worked at the IMF. The economy expanded 7.4 percent in the third quarter from a year earlier.
Even so, banks are failing to take advantage of loan discounts permitted by the government, limiting them to 10 percent of the benchmark lending rate for the best corporate clients, officials at the top four lenders said this month, Bloomberg News reported.
Elsewhere in Asia, Japan’s retail sales rose less than forecast in September as the expiration of government subsidies for car purchases sapped consumer demand. South Korean manufacturers’ confidence fell for the second straight month as slowing economic growth weighed on sentiment.
In the U.K., house prices fell for a fourth month in October and a property-market recovery is unlikely without sustained economic growth, according to Hometrack Ltd., a London-based researcher. Prices declined 0.1 percent from September and 0.4 percent from a year earlier, the smallest annual decline in two years.
A U.S. report today may show consumers ended the third quarter on a strong note. Household spending probably increased 0.6 percent in September, the biggest gain in seven months, according to the median estimate in a Bloomberg survey.
In China, any fiscal tightening may not be limited to the central government. Some local authorities have become more aggressive in collecting taxes and levying administrative fees on companies after income from land sales cooled amid China’s housing-market controls, the Economic Information Daily reported Oct. 22.
“As local governments in China are not allowed to carry deficits in their budgets, they have to scramble for funds when they are short of money, and increasing levies on businesses has become an easy option for some,” said Feng Xingyuan, a vice director with Unirule Institute of Economics, a private researcher based in Beijing. “It would be bad for the real economy.”
China’s annual budget report has usually underestimated actual fiscal revenue growth to allow the government to spend a lot approaching year-end, a seasonal effect that may disappear this year, Song said.
“Fiscal firepower in the fourth quarter is not as strong as past years,” Mirae’s Yang said. “That’s one of the downside risks for the fourth quarter.”
--Zhou Xin. With assistance from Michael Heath in Sydney. Editors: Scott Lanman, Paul Panckhurst
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