Debt, deficits and depressed consumers
Does China have the fiscal firepower to rescue its economy?
There is a fierce debate over whether it can afford to keep spending
MAASTRICHT IS A small Dutch city that casts a big economic shadow.
European leaders gathered there in 1992 to sign the treaty that led to the euro.
Serenaded by a marching band, they vowed to keep their budget deficits below 3% of GDP and their government debt below 60%.
The numbers made little sense; one prominent economist has dismissed them as “fiscal numerology”.
But they came to define what counts as a respectable, squared-away fiscal policy—even far beyond Europe.
China, for example, has taken pride in meeting these norms through thick and thin.
In 2009, at the height of the global financial crisis, its official deficit was less than 2.8%.
It is striking, therefore, that China has breached the Maastricht limit three times in the past five years (see chart).
“Special measures are required for special circumstances,” the finance ministry said in 2020 after the covid-19 pandemic struck.
Five years later, what was special is becoming routine.
China plans to increase its deficit to 4% of GDP in 2025, according to Reuters, a news agency.
With household confidence low, property investment shrinking and exports threatened by tariffs, the economy needs the extra fiscal push.
By spending more itself, the government hopes to encourage others to do likewise.
On January 8th China’s planning agency said it would enlarge two “trade-in” schemes which offer financial help to firms and households replacing old kit for new.
Consumers can now be offered subsidies of up to 500 yuan ($68) for new smartwatches, phones and tablets.
The scheme will also encompass dishwashers, rice cookers and home decoration.
China’s government has long insisted that homes are for living in, not for speculation.
Now they’re for renovation, too.
In November the finance minister, Lan Fo’an, insisted China can afford such generosity, claiming it has plenty of fiscal “room”.
Is he right?
One reason to worry is that the official deficit covers only a fraction of public borrowing.
If you add the government’s three other accounts—covering social insurance, land-financed infrastructure spending and transactions with state-owned enterprises—the deficit was probably 7.1% of GDP in 2024, according to Fitch, a ratings agency.
Even broader measures are possible.
The IMF calculates an “augmented” deficit, which includes a lot of red ink that does not appear in the budget.
One example is borrowing by local-government “financing vehicles”, which invest in infrastructure and other ventures.
By this measure, the IMF thinks China’s deficit this year could exceed 13% of GDP and its debt could reach almost 129%.
When plugged into the IMF’s models, these figures suggest China’s risk of debt stress is “high” in the medium term.
Credit-rating agencies have also taken note.
China’s (on-budget) deficit is more than double that of the median country with a similar A credit rating, Fitch points out.
In April it said China was at risk of a downgrade.
That could make borrowing more expensive for the many state-owned banks and enterprises whose ratings are tightly linked to the sovereign’s.
China’s public finances also face longer-term strains.
With an ageing population, the share of GDP devoted to pension spending will increase by about nine percentage points by mid-century, estimates the IMF.
The erosion of China’s government revenues appears persistent.
They began to decline even before the pandemic, notes Jeremy Zook of Fitch, falling from about 30% of GDP in 2018 to roughly 23% in 2024.
And China has yet to find a source of revenue to replace land sales, which have suffered from the property slump.
In light of such difficulties, Rhodium Group, an American research firm, has argued that China’s “fiscal space” is a myth.
But a government’s room to borrow and spend partly depends on what else is going on in the economy.
The space available depends on who else wants to fill it.
If the private sector is in an expansive mood, government deficits get in the way, pushing up borrowing costs and inflation.
China, sadly, has the opposite problem.
Households and private entrepreneurs are in retreat, reluctant to spend and all too eager to accumulate safe financial assets instead.
That has left the economy short of demand and prone to deflation: consumer prices rose by only 0.1% in December, compared with a year earlier.
The rest of the economy’s eagerness to save, not spend, has also made it extraordinarily cheap for the central government to finance itself.
It can now borrow for ten years at yields of about 1.6%, a record low.
The rest of the economy is, in other words, making plenty of room for the state to extend itself.
The demand for the government’s paper is helped by China’s capital controls, which make it harder for domestic investors to seek safe havens abroad.
Many government bonds are held by banks that the government happens to own.
Indeed, just as China’s tentacular state has liabilities scattered all over the economy, it has a sprawling collection of assets, too.
W. Raphael Lam and Marialuz Moreno-Badia of the IMF estimate that fiscal deposits in the banking system amounted to about 18% of GDP in 2019 (excluding money earmarked for payments for services).
The government’s equity holdings in state-owned firms and financial institutions totalled another 68%.
The social-insurance funds also held assets exceeding 2% of GDP.
Whatever the long-term risks, the central government therefore has the wherewithal to rescue the economy from its immediate predicaments.
The IMF has urged Beijing to end China’s property crisis by providing more of the financing required to complete pre-sold, but unfinished, buildings (or to compensate their buyers).
The likely aim of China’s fiscal push is to bolster the confidence of households, according to Mr Zook.
The more of their income households spend, the less the state will have to do to prop up demand.
The government can then cut back without jeopardising the recovery.
“The boom, not the slump, is the right time for austerity at the Treasury,” said John Maynard Keynes during the Great Depression.
His budgetary maxim is many decades older than the Maastricht treaty.
It deserves to cast an even longer fiscal shadow.
0 comments:
Publicar un comentario