March 6, 2015 / 8:34 AM / 2 years ago

China's finance minister flags wider fiscal deficit as economy cools

4 Min Read

Journalists raise their hands to ask questions to China's Finance Minister Lou Jiwei at a news conference in Beijing March 6, 2015.Kim Kyung-Hoon

BEIJING (Reuters) - China will pursue an expansionary fiscal policy this year to prevent its economy from stalling, Finance Minister Lou Jiwei said on Friday as he assured investors that authorities are keeping an eye on heavily-indebted local governments.

Asked how China would manage its rising debt levels as its economy loses steam, Lou said the country has to balance the need to deleverage without pushing the economy over a "cliff".

To underscore the importance of state spending, he said China's actual fiscal deficit should be worth 2.7 percent of its 2015 gross domestic product (GDP) after taking into account 112.4 billion yuan ($18 billion) that was allocated to previous budgets but was not yet spent.

China had announced on Thursday a planned 2015 fiscal deficit of 2.3 percent of GDP, or 1.62 trillion yuan ($258.61 billion), at the opening of the annual meeting of the National People's Congress, the country's parliament.

A fiscal deficit of 2.7 percent compared with last year's deficit of 2.1 percent and would be China's widest since 2009, when Beijing splurged on stimulus to counter the global financial crisis and chalked up a deficit of 2.8 percent.

"To withstand the downward pressure, we must adopt an appropriately expansionary fiscal policy," Lou told reporters at an annual press conference. "We have to steadily deleverage, but must also prevent the economy from falling off a cliff."

He said China's economy is pressured by a weak global economic recovery and domestic constraints that included the need to reduce debt levels gradually.

"The proportion of debt in some areas is too high, and we will pay more attention to those," Lou said.

Single-Digit Fiscal Income Growth

Despite promising "active" fiscal policy, China is unlikely to dive into another round of massive state spending, given it is still struggling to deal with a mountain of local government debt left from a 4 trillion yuan stimulus program launched in 2009.

Indeed, local governments have borrowed more than $3 trillion in recent years to pay for infrastructure projects.

The bulk of these loans are due to be repaid between 2015 and 2017, further draining government coffers at a time when fiscal revenue growth is also falling. Lou said on Friday local governments would have to repay more than 100 billion yuan in debt this year.

Acknowledging the strains in the state budget, Lou said growth in China's fiscal income was likely to be in the single-digits in coming months. But he said China has ideas about how to pay off its local government debt.

Some public works can charge a usage fee to generate a steady cash flow, and the government can make up for any difference with subsidies through public-private partnerships.

The Finance Ministry has also reported a portion of debt that was incurred due to the provision of public services, and the state may step in to pay off these dues by selling bonds that would hopefully lower interest payments, Lou said.

($1 = 6.2635 Chinese yuan)

Editing by Kim Coghill and Jacqueline Wong

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