China's Finance Minister Indicates Room for More Government Debt

  • Xiao says current budget deficit ratio still has flexibility
  • China plans 3% budget deficit ratio in 2017, same as last year

China still has some flexibility to adjust the budget deficit ratio, Finance Minister Xiao Jie said, signaling the government will increase government spending in line with the growing economy while also paying off debt.

Whether to expand the budget deficit ratio will depend on the ability to repay the new debt, Xiao said Tuesday at a press conference in Beijing on the sidelines of the annual legislative sessions of the National People’s Congress.

"A growing Chinese economy and fiscal income are the fundamental supports to repay debts,” he said.

The central government must decide whether to take on additional debt to support investment in coming years as the world’s second-largest economy faces financial risks at home and the prospect of trade conflicts amid global protectionism.

It also means the government could face greater risks from soaring debt. Total outstanding credit at the end of last year was equal to 258 percent of economic output, up from 161 percent in 2008, according to Bloomberg Intelligence estimates.

The debt burden is unevenly distributed. While the central government has a relatively low debt ratio, the corporate sector and local governments are more indebted.

Other takeaways from the press conference:

  • China is studying an individual income tax reform plan
    • Some household spending items may be exempt from individual income tax
  • Xiao said the government doesn’t have a transparency problem despite omitting military and other security spending numbers in the fiscal budget report
    • Military and public spending are laid out in the budget draft but not the budget report released to the public, he said
  • Local governments will continue to sell general and special bonds this year
  • China will give tax breaks of about 35 billion yuan ($5 billion) to enterprises this year

Premier Li Keqiang set the tone for the gathering on Sunday, laying down a 2017 economic growth target of about 6.5 percent or higher, and a budget deficit ratio of 3 percent, while warning of “graver” risks to China’s economy from protectionism and domestic imbalances ahead.

Xiao made the remarks at his first public appearance after succeeding the reform-minded Lou Jiwei as finance minister in November. Xiao, 59, had previously served as vice secretary-general of the State Council, a key aide to Li.

Read More: China’s New Finance Minister Faces Fiscal Fix in Juggling Act

China’s budget deficit will grow in 2017 to fund tax reduction, expenditures and spending in key areas, and the addition amount will be in proportion with the projected rise in gross domestic product, he said.

Xiao said China is able to control local debt levels, adding the central government debt ratio, which was 36.7 percent last year, won’t change much this year.

— With assistance by Yinan Zhao, and Xiaoqing Pi

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