China Said to Defy Analysts With Plan for Unchanged Deficit

  • Authorities said to propose keeping 2017 deficit at 3% of GDP
  • Economists had expected larger gap to prop up growth this year

Chinese authorities plan to propose that this year’s fiscal deficit stay at 3 percent of gross domestic product, unchanged from 2016, according to people familiar with the matter, signaling further tolerance for slower economic growth.

The budget deficit, usually announced in March, requires approval by the National People’s Congress and is subject to change, said the people, who asked not to be identified as the proposal hadn’t yet been made public. The Finance Ministry didn’t immediately respond to a faxed request for comment.

Many economists had forecast that the gap would increase in 2017, thereby strengthening the hand of authorities to shore up the economy with fiscal policy. A decision to hold the deficit at 3 percent of GDP would echo sentiments expressed by senior Chinese leaders last month that they’ll place greater emphasis this year on curbing financial risks, even at the expense of growth.

China’s deficit ratio has increased every year since 2012, with economists having expected it to rise again this year to 3.5 percent, according to the median estimate in a survey conducted by Bloomberg.

Read More: China Plans Prudent, Neutral Monetary Policy for Next Year

At the same time, Chinese authorities also have other off-budget tools, such as using bond issuance by state-owned policy banks to fund construction projects. China’s fiscal deficit ratio last year could have exceeded 10 percent when taking into account such spending, according to economists at UBS Group AG and JPMorgan Chase & Co.

Following an annual conference last month to map out economic policy for the coming year, senior leaders issued a statement that said controlling financial risks to avoid asset bubbles would be a priority, along with deepening supply-side structural reform.

Concerns about financial risks have also contributed to a pause in cuts to interest rates and required reserves for commercial banks, which has in turn increased the importance of fiscal policy in steadying the economy. The People’s Bank of China has held its benchmark rates at a record low since October 2015 and last reduced reserve requirements in February.

In a statement issued Friday after a PBOC meeting to plan policies for 2017, the PBOC pledged to firmly guard against systemic risks in the financial system.

— With assistance by Xiaoqing Pi, Jing Zhao, and Steven Yang

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE