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Friday, March 6, 2015, 09:35

Wider fiscal deficit to counter slowdown

By Zheng Yangpeng
Wider fiscal deficit to counter slowdown
Rail tracks are laid on a route in Nantong, Jiangsu province. Premier Li Keqiang said on Thursday that China will invest 800 billion yuan in railway construction this year. (Xu Congjun / For China)

The nation aims to run a larger budget deficit this year to counteract the economic slowdown, but some analysts question whether the increase in spending is adequate.

In his annual work report to the National People's Congress on Thursday, Premier Li Keqiang targeted a 1.62 trillion yuan ($258 billion) budget deficit, 270 billion yuan wider than last year's. This year's figure represents 2.3 percent of the nation's GDP, up from 2.1 percent last year.

The higher deficit-to-GDP ratio signals a more proactive fiscal policy, but it is less than most institutions' forecasts.

"It's not clear the government is putting enough on the table to guarantee achievement of even its more modest 7 percent growth target," Bloomberg economists Tom Orlik and Fielding Chen wrote in a report following the announcement. "We had expected a budget deficit target of 2.5 percent of GDP, including more substantial moves to allow borrowing by local governments. Even that would have raised questions about the adequacy of policy support for demand."

Zhu Haibin, chief China economist with JPMorgan Chase & Co, said the deficit-to-GDP ratio is lower than the bank's 2.9 percent estimate, raising concern that it may be a drag on growth.

"This year's fiscal policy at best is 'neutral' ... as local governments' financing ability was curbed, it could lead to insufficient investment in public spending, especially on infrastructure," he said.

Nomura Securities Co said in a research note that the deficit is smaller than it had expected, which it described as a "mildly proactive" fiscal policy.

Economists said implementation of the budget will be crucial. In past years, the deficit has come in considerably below target. In 2014, the actual fiscal deficit was 1.13 trillion yuan, or 1.78 percent of GDP. If the 2.3 percent fiscal deficit is strictly implemented, it could be a significant boost over last year.

Analysts also noted the change in wording of China's fiscal policy.

The Government Work Report promised to "increase the strength and effectiveness" of fiscal policy. That wording implies a step forward from the Central Economic Work Conference held late last year, which promised "more strength" in fiscal policy.

Local governments' aggregate fiscal deficit was enlarged to 500 billion yuan from 400 billion yuan last year. The Ministry of Finance in its report said that besides general municipal bonds, provincial governments will also be allowed to issue "special bonds", which China International Capital Corp projected to be 300 billion yuan.

Under the more proactive fiscal policy, the Government Work Report promised 800 billion yuan in spending on rail and 800 billion yuan on water projects. The target for the construction of subsidized housing is 7.4 million units, up from 7 million units last year.

A highlight in the Ministry of Finance work report is a commitment to offer incentives for local governments to speed up urbanization. It promised to "link the transfer payments that local governments receive to their performance in granting urban residency rights to eligible migrant workers within their jurisdiction".

Such a move would help China's 260 million migrants to have permanent roots in cities by giving them hukou (residence permit), which is critical for bolstering consumption and real estate demand.

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