China proposes wider fiscal deficit

Business | Bloomberg and Reuters 10 Jan 2019

China's finance ministry will propose an annual fiscal deficit target of 2.8 percent of gross domestic product (GDP) for 2019, up slightly from the 2.6 percent target set for 2018, Bloomberg reported citing two unidentified sources.

China's annual economic targets, usually announced in March, are closely watched by financial markets for hints of any changes in its fiscal and monetary policies, which shifted into growth-boosting mode last year as the economy started to slow.

The report said the proposed target was presented during the ministry's annual work conference in December and remains subject to approval by China's legislature.

Policymakers have pledged to step up support for the cooling economy this year, following a raft of measures in 2018 including fast tracking infrastructure projects and cuts in banks' reserve requirements and taxes.

Officials have pledged more aggressive tax reductions in 2019, fanning expectations among economists that the annual budget deficit ratio could be lifted to 3 percent.

But the deficit could be limited by an expected jump in special bond issuance by local governments to fund infrastructure investment. Some economists expect such bond issuance to hit 2 trillion yuan ($292.53 billion), up from 1.35 trillion yuan last year.

In 2018, the government cut the annual budget deficit target to 2.6 percent of GDP from 3 percent in 2017 - the first cut since 2012.

But officials said fiscal policy remained supportive given a 550 billion yuan jump in planned special bond issuance by local governments to fund key projects.

Data later this month is expected to show China's economic growth slowed to around 6.6 percent in 2018 from 6.9 percent the previous year. Analysts are forecasting a further loss of momentum in coming months before policy support measures begin to kick in.

China's yuan is still expected to breach the key 7-per-dollar mark within six months as a dimming economic growth outlook is likely to push the central bank toward easier monetary policy this year, a Reuters poll found.

Although the yuan fell about 6 percent last year, with most losses coming after June when the U.S.-China trade war escalated, it still did not crack the 7-per-dollar rate.

Meanwhile, Fitch could cut China's A+ credit rating or stable outlook if Beijing reverts to the kind of debt-fuelled stimulus programmes it has used in the past, the firm's top sovereign analyst said.

Fitch's head sovereign analyst James McCormack said his firm still expected Beijing to keep its pledge and stick to tackling high levels of corporate debt, but underscored the risks to the rating if authorities did reach for the stimulus levers.

"If the policy response to slowing growth was similar to what we saw around the time of the global financial crisis, then that would cause us to look again at the rating," McCormack told Reuters. "Because we think that would increase macroeconomic imbalances in China when debt levels in the corporate sector are already high."

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