China Deficit to Exceed Limit as Spending Mounts, Economists Say

  • Six out of 13 analysts see deficit at 2.6%-3% of GDP in 2016
  • Spending has jumped 18.1% in first 10 months of this year

China’s increased government spending may see the budget deficit exceed the official target this year as policy makers shift reliance to fiscal support given the failure of monetary easing to spur a pick up in growth.

Spending will surpass the budget deficit ratio of 2.3 percent of gross domestic product by year end, according to eight of 13 economists in a Bloomberg News survey conducted from Nov. 12-17. All but one said the government will increase the ratio next year or keep it unchanged, and six project the target will rise to between 2.6 and 3 percent.

With record-low interest rates and other monetary easing failing to generate the kind of growth the government wants, policy makers have sped up spending, accelerated infrastructure projects and boosted lending capacity at policy banks to keep Premier Li Keqiang’s 7 percent growth goal within reach. Top leaders have signaled they still have room to spend as the current deficit ratio is relatively low compared with other nations.

"It’s necessary for fiscal policy to do more," said Le Xia, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. "Monetary easing isn’t working well."

Five economists project this year’s budget deficit will end up being 2.5 percent of GDP, while two expect it will increase to 2.4 percent, the survey showed.

Spending in the first 10 months of this year increased 18.1 percent from a year earlier, while revenue rose 7.7 percent, according to the Ministry of Finance. The deficit is likely to widen because the government usually makes some of its biggest expenditures in the last two months of the year.

The National People’s Congress reviews and approves the budget every March. Finance Minister Lou Jiwei said this March that the budget deficit in 2015 would be 2.7 percent if some disposable spending were included in the total. The government has also orchestrated a bond-swap program for provincial entities to exchange costly bank debt into longer dated notes.

In a speech circulated by state media last week, Li indicated the government has room to act given that the fiscal deficit is "only" 2.3 percent, adding that the country could lower taxes further.

Not all economists said spending will break the target. Xu Gao of Everbright Securities Co. said China will keep the deficit below the level, in part because the central government may tap some of its rainy-day savings in its stabilization fund.

Vice Finance Minister Zhu Guangyao said this month the “red line” of 3 percent for the deficit-to-GDP ratio and 60 percent for the debt-to-GDP ratio should be revisited after lessons learned from the financial crisis.

Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong, agrees.

"Fiscal policy should be more proactive, including raising the deficit and cutting taxes," Zhu said. The policy of following the 3 percent red line "needs to be revised."

— With assistance by Xiaoqing Pi, and Cynthia Li

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