China’s fiscal policy to be more active, but not extreme: ANZ Bank

HONG KONG - ANZ's Senior China Economist, Betty Wang, believes China's consolidated fiscal deficit could jump to as high as 9.0% of GDP due to fiscal repair measures likely in the wake of the COVID-19 pandemic.

In a note titled 'China primer: the fiscal reality', she says a three-pronged approach is expected, to include:

1) An increase in the official fiscal deficit to 3.5% of GDP;

2) An expansion in the annual issuance quota of special local government bonds (SLGBs) to CNY3.6 trillion; and

3) Bringing back special treasury bonds (STBs) with total issuance worth at least CNY1 trillion.

Wang says: "Compared with many countries which consistently have large fiscal deficits or foreign debt, China has stronger ammunition on the fiscal front.

"This advantage allows for a more disciplined monetary policy.

"Since the Government also wants to develop a more active capital market to mobilise social financial resources, more pro-active fiscal policy combined with flexible monetary policy will be a policy norm in the near term."

She explains that concerns about an increasing macro leverage ratio have prompted Chinese authorities to adopt a more conservative fiscal policy in the past two years, as evidenced by a smaller official fiscal deficit set at 2.6% and 2.8% of GDP in 2018 and 2019 respectively, compared with 2.9% in 2016 and 2017.

"However, with the global pandemic bringing about significant downside risks, debate on whether China should adopt a more aggressive monetary and fiscal policy has increased.

"Following the various monetary measures to inject liquidity and reduce funding costs, the Chinese Government and the Ministry of Finance have made it clear that fiscal policy will play a more pro-active role henceforth."

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