China's Moderately Expansive Fiscal Stance Boosts Economic Recovery

By CCB International

This year’s Government Work Report from the Chinese State Council emphasized stabilizing growth. At the “Two Sessions” in early March, the government set its growth target for 2024 at around 5% and reaffirmed the commitment made at last year’s Central Economic Work Conference that proactive fiscal policy would provide adequate support with greater focus on quality and effectiveness. Other goals for 2024 included a deficit ratio of 3%, total deficit of 4.06 trillion yuan ($561 billion), an increase in general public budget expenditure by 1.1 trillion yuan and a plan to issue ultra-long special treasury bonds.

On balance, such a moderately expansionary fiscal stance will help drive economic recovery. But given ongoing policy focus on resolving risks associated with the property sector, local government debt and small- and medium-sized financial institutions, a bazooka-style stimulus is probably not in the cards. The Work Report also stressed the need to expand domestic demand. And pro-employment policies and adjustments to entry barriers in some sectors for foreign investors laid out in the report will also further support the economy.

China’s industrial output grew by 7% in the first two months of the year, with computing, telecommunication, electronics and transportation equipment remaining as main categories propelling industrial expansion. On the household consumption side, things are also trending in the right direction as offline consumption gradually comes back. Despite a slight rise in the urban surveyed unemployment rate to 5.3% in February, recovery in the service sector bodes well for employment and consumption growth.

In fact, the Chinese government adopted a rather proactive fiscal stance at the beginning of the year, determined to offset headwinds facing growth. According to data published by the Ministry of Finance on fiscal expenditure in the first two months of 2024, general public budget revenue dropped by 2.3% year-on-year during the two-month period. But excluding delayed tax collection in previous years that arrived at state coffers during the first two months of 2023, and adding back tax revenue uncollected during the first two months of 2024 due to tax reduction policies introduced in mid-2023, year-on-year budget revenue was actually up 2.5%.

At the same time, general public budget expenditure grew by 6.4% in the first two months of the year, accounting for 15.3% of the full-year target. The government is spending at a faster rate than in the in the past five years during the same period. Despite government-managed fund budget expenditure coming down due to the pace of local government special-purpose bond issuance, total fiscal expenditure increased by 2.7%. Together with a revenue decline at the beginning of the year, the total fiscal deficit expanded by around 230 billion yuan from the same period last year. 

Limited room for rate cuts

One thing worth noting is the slowdown in issuance of city construction investment bonds. As of March, the size of issued debt for city construction investment bonds had declined by 4% and net financing was only one quarter of the level of last year, suggesting an ongoing need for local governments to deleverage, thus raising the need for more fiscal support from the central government. In February, the People’s Bank of China cut the reserve requirement ratio (RRR) by a higher-than-expected 0.5 percentage points and injected 1 trillion yuan of long-term liquidity into the economy. With market liquidity at a sufficient level, financial institutions’ needs for medium-term lending facility (MLF) lending has come down.

Meanwhile, the People’s Bank of China has kept MLF rates unchanged and short-term interbank funding rates are also stable, reflecting a cautious approach to interest rate cuts.

We expect monetary policy to remain accommodative in the short term with the possibility of RRR and policy rate cuts in the second quarter. But unless new economic data is much weaker than expected or if the central bank is willing to ease more drastically than the market now expects, room for interest rate cuts is likely to be limited.

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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