China’s fiscal income to slow;room for more government debt

BEIJING: Growth in China's fiscal income will slow in future, but the country still has room to increase government debt, Finance Minister Lou Jiwei said in Beijing on Monday.China could moderately increase its fiscal deficit ratio to gross domestic product (GDP), although not by too much, Lou Jiwei said at a news conference during the annual session of parliament.

"Our fiscal income is in a severe situation. We need to expand the fiscal deficit, but it is hard to say how much room is appropriate," Lou said.

"We have some room, but cannot increase too much," added, noting that China's fiscal income accounts for around 30 percent of GDP, "which is relatively low compared with other countries and far lower than that in developed countries."

China has budgeted a 2016 deficit of 3 percent of gross domestic product, the finance ministry said on Saturday, compared with an actual fiscal deficit ratio of 2.4 percent in 2015.

Some analysts say that target is too conservative to actually stabilize sliding economic growth, while others warn of the impact it could have on the government's balance sheet.

"This points to a further increase in leverage in the economy which risks raising contingent liabilities for the government," said Marie Diron, a senior vice president at Moody's in emailed comments on the new deficit target.

Moody's downgraded its outlook on Chinese government debt to "negative" from "stable" on Wednesday, citing uncertainty over authorities' capacity to implement economic reforms, rising government debt and falling reserves.

HSBC estimates central and local government budgeted bond issuance together will increase by nearly 35 percent this year to 2.18 trillion yuan ($334.76 billion).The 3 percent deficit target disappointed some analysts, who had hoped for more aggressive measures to prop up growth in the world's second-largest economy.

However, Chinese regulators have also said they will increase the efficiency of government investment, which would theoretically produce better economic gains without aggravating China's already massive stockpile of underperforming loans.

However, whether central government has gotten better at precisely targeting lending, as opposed to spurring overinvestment in industries seen as favored by Beijing that results in asset bubbles, is a major question.

Lou said that if state-owned banks see profitability fall thanks to increased levels of non-performing loans, the finance ministry would give them "appropriate help". But he denied this support would constitute special treatment for banks in which the government is a major shareholder.

Chinese officials are still incentivised to drive economic growth, and quick investment projects in infrastructure, airports or commercial real estate is generally the easiest way to do so, regardless of whether the project actually meet a market need or not.

"The longer the Chinese economy continues to add debt, the more risky we will perceive the situation to be," said Andrew Colquhoun, head of Asia-Pacific sovereign rating at Fitch.

Central bank vice governor Yi Gang said in a separate conference that he is confident that China has adequate foreign exchange reserves, pointing out they are the largest in the world.