China: Party Congress Means China Has Spent Year-End Surge Already – 9 Aug 2017

  • In the run up to China’s blockbuster Communist Party congress later in 2017, officials have spent big to ensure the economy is humming along nicely when the conclave begins.
  • It’s after that that things get interesting. With the central government’s deficit limit capped at 3%, officials usually turn on the taps around Nov 17 and Dec 17, once they know they’ll have raised enough to fund a late-year splurge. Not this time.
  • A push to smooth out spending means the fiscal pump is unlikely to go into high gear at end of 2017, which is when economists see growth moderating toward the government’s baseline of 6.5%. While policy makers have quasi-fiscal options up their sleeve — like accelerating infrastructure project approvals or ratcheting up lending via policy banks — efforts to curb profligate local governments and limit debt may restrain those channels too.
  • China ran a fiscal deficit of CNY918bn (USD137bn) in 1H17, or more than 2% of economic output during the period, Bloomberg calculations show. That’s a record both by value and share. The spending fueled better-than-expected economic growth of 6.9% in 1H17, and infrastructure investment surging at over 20%.
  • The world’s second-largest economy still depends on government spending at all levels, as construction of things like roads and railways can be a key buffer when private investors start pulling back or, as now, political sensitivities make robust growth especially important. But those priorities are now clashing with the need to clamp down on indebtedness at lower levels of government, and the desire to avoid a year-end spending glut.
  • In the past, officials have been able to use off-balance sheet spending, such as policy bank loans and funds raised through local government financing vehicles, to keep their deep pockets open.
  • The so-called augmented fiscal deficit, a ratio that includes disposable revenues from land sales, policy banks and other channels, was estimated at more than 10% in 2016, according to the International Monetary Fund.
  • That additional ammunition will be strained in 2017 too. With top leaders tightening their oversight of local government financing and on substandard public-private partnership projects, a key fundraising channel for authorities is being put under stricter review.

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