China's Proactive Fiscal Policy for Economic Growth

China is planning to implement a "very proactive" fiscal policy this year, with the aim of supporting its economy. According to Vice-Minister of Finance Liao Min, this approach will involve increasing the deficit-to-GDP ratio and issuing a larger volume of government bonds. The government intends to "front-load" its fiscal measures to better foster a positive trajectory for economic growth.

As China faces various challenges both domestically and internationally, Liao emphasized that policymakers have "ample policy space and a diverse tool kit" to respond to changing circumstances. In times of new challenges, the government is prepared to utilize its policy reserves.

With China's GDP growth on a stable path, Liao noted that raising the deficit ratio will lead to a significant increase in the overall budget deficit. This strategy will allow for a boost in total fiscal expenditures and a more robust approach to countercyclical adjustments.

Though specific figures regarding the deficit increase will be disclosed following appropriate legal procedures, analysts predict that the deficit-to-GDP ratio could reach as high as 4 percent this year, an increase from the current target of 3 percent set for 2024.

Given the ongoing recovery challenges in the property market and uncertainties in the export sector due to rising global protectionism, experts believe it is crucial for the government to leverage effective fiscal strategies to stimulate domestic demand. Luo Zhiheng, chief economist at Yuekai Securities, suggests that targeting a higher deficit could be vital for maintaining China's growth momentum.

China’s current deficit ratio is considerably lower than those of other major economies and emerging markets, which indicates a sound fiscal position. According to Liao, the government debt is underpinned by a considerable amount of high-quality assets, which yield both social and economic benefits.

Additionally, Liao highlighted that China's real interest rate on government debt is significantly lower than the actual growth rate of the economy. This scenario suggests a strong capacity for debt tolerance and the potential for further deficit expansion.

With the anticipated increase in the deficit ratio, Liao expects a noticeable expansion in bank credit and social capital investment, which should lead to a marked rise in effective domestic demand.

Liao also confirmed plans to increase the scale of government bond issuances this year, which will include ultralong special treasury bonds and local government special-purpose bonds. Ultralong special treasury bonds are expected to rise from 1 trillion yuan (approximately $136.38 billion) in 2024 to between 1.5 to 2 trillion yuan this year. This move is intended to support large-scale upgrades in equipment and the consumer goods trade-in initiatives.

Furthermore, the issuance of local government special-purpose bonds is projected to grow from 3.9 trillion yuan in 2024 to around 7 trillion yuan this year, which will include a debt swap quota of 2.8 trillion yuan. Local authorities will also be allowed to use special-purpose bonds for purchasing land reserves and existing commercial properties to provide affordable housing solutions.

China, Fiscal, Growth