(Bloomberg) -- A growing chorus of Chinese economists called on Beijing to break away from an implicit budget deficit ceiling, opening the door to more central government borrowing as a way to shore up the faltering economy.
Officials can consider doubling or tripling this year’s special sovereign bonds to as much as 3 trillion yuan ($420 billion), said Zhang Ming, deputy director of the Institute of Finance & Banking at the Chinese Academy of Social Sciences, a top government think tank. This should go toward subsidizing consumers and alleviating local government debt risks, he added.
The deficit ceiling of 3% to gross domestic product should also be increased to give the Ministry of Finance more policy flexibility, he said in a note on WeChat.
That’s not without precedent. China made a rare revision to its deficit ratio in October last year to 3.8% of GDP from the original 3%, resulting in the sale of 1 trillion yuan of additional sovereign bonds. This year, it set the ratio at 3% again — a limit it has long tried to keep to maintain fiscal discipline and project a positive view of the economy.
Zhang’s call for more aggressive borrowing by Beijing echo that of other Chinese economists and former officials, including retired finance minister Lou Jiwei, and Yu Yongding, an ex-central bank advisor. China’s growth slowed to the worst pace in five quarters, drawing renewed attention to the need for more fiscal stimulus to help Beijing hit its full-year growth goal of about 5%.
“If we adhere to the central budget deficit level of 3% no matter what it takes, fiscal spending will inevitably contract and become pro-cyclical,” Zhang said, warning about the risks of policy measures failing to boost growth.
A more active fiscal policy is needed to deal with the challenges of the property market slowdown, weaker fiscal position of local governments, and sluggish household consumption, Chenjie Liu, chairman of Upright Asset Management, wrote in a note published on WeChat late Tuesday. “Raising the fiscal deficit ratio is an appropriate and effective policy tool,” he added.
The deficit-to-GDP ratio should be raised by 3 percentage points — or 4 trillion to 5 trillion yuan based on the estimated size of GDP this year — mainly in the form of higher central government borrowing, he said. Liu used to be a strategist at Goldman Sachs Group Inc. in China and received his PhD from the Chinese Academy of Fiscal Sciences, which is linked to the Ministry of Finance.
China has tried to boost growth by cutting interest rates but they’ve failed to move the needle for borrowers in the face of a persistent housing downturn and gloomy job market. Fiscal stimulus and property measures would be more effective in reviving demand, but they’re among the options the government has been cautious about taking on a large scale because of debt worries.
The focus now should be on preventing short-term economic problems from becoming long-term issues, said China Securities Co. economists including Huang Wentao in a Tuesday note. Fiscal policies need to be further strengthened, such as by speeding up the issuance of government bonds and increasing transfer payments to local governments and residents, he added.
Huang called for the government to steer funds toward stimulating consumption, as well as strengthening the social safety net and public services. This could address issues such as overcapacity and low-efficiency investment, he added.
Government spending has been slow this year, mainly because local authorities struggled to find quality projects to invest their money raised from special bond issuance. Expenditure under the government fund budget, which includes infrastructure investment, slumped 17.6% year-on-year in the first half.
Policymakers have pledged to allow local governments to use money raised from special bonds in broader areas. They are considering a proposal to let local authorities use these bonds to fund their purchases of unsold homes as part of efforts to prop up the housing market, Bloomberg reported this week.
Liu said China needs to shore up economic growth to improve the return on investment to keep debt risks in check. Authorities could use a third of additional funds from potentially boosting the deficit ratio to spur consumption, such as by handing out direct subsidies to less well-off families.
Another one-third could be given to local governments to repay debt owed to private companies. The rest could be invested in technology development and high-end manufacturing, Liu added.
--With assistance from James Mayger.
(Updates with CASS researcher’s comments from second paragraph)
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