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China plans flexible fiscal policy with special bonds, as growth target seen at 5 percent

By News Desk
December 16, 2023

Beijing: Chinese leaders agreed at an annual meeting on the economy this week to run a budget deficit of 3 percent of gross domestic product in 2024, three sources with knowledge of the matter said, while other fiscal support may be covered by off-budget debt.

While the deficit figure is lower than this year's revised 3.8 percent target, suggesting Beijing wants to maintain fiscal discipline and is not considering a big fiscal bazooka next year, the option to issue off-budget sovereign debt gives it flexibility to step up stimulus to maintain stable economic growth.

The headquarters of the Peoples Bank of China. — AFP/File
The headquarters of the People's Bank of China. — AFP/File

Two of the sources told Reuters special sovereign bonds could be issued to pay for extra expenditures as needed. One of them said they could amount to 1 trillion yuan ($140.16 billion).

All three sources spoke on condition of anonymity due to the sensitivity of the discussions.

China has issued special treasury bonds before. In 2020, it sold 1 trillion yuan in such debt to fund Covid-related measures. In 2007, it issued 1.55 trillion yuan to capitalise its sovereign wealth fund. In 1998, it issued 270 billion yuan to recapitalise state banks.

China does not include special bonds in its annual budget plans, as it sees the instrument as an extraordinary measure to raise proceeds for specific projects or policy goals in times of need.

"The 2024 deficit ratio is set to be 3 percent and the insufficient part can be supplemented by special sovereign debt," one of the sources said.

China's State Council Information Office, which handles media queries on behalf of the government, the finance ministry, and top state planner the National Development and Reform Commission did not immediately respond to a Reuters' request for comment.

The official targets are usually not announced publicly until China's annual parliament meeting, usually held in March.

Another key part of China's overall fiscal stance is the bond quota local governments are allowed to issue, which is also outside the government's budget. One of the sources said it could be close to 4 trillion yuan in 2024, versus 3.8 trillion yuan this year.

The other sources did not provide any figure.

The annual Central Economic Work Conference, during which President Xi Jinping and other top officials chart the course for the world's second-largest economy in the coming year, took place behind closed doors on Monday and Tuesday.

A readout of the meeting by state news agency Xinhua said the leaders agreed to a proactive fiscal policy for 2024.

China plans a new round of fiscal and tax reforms and the government is looking to improve the structure of fiscal spending to support strategic tasks, state media said, without giving details.

The Politburo, a top decision-making body of the ruling Communist Party, said last week that fiscal policy would be "flexible, moderate, precise, and effective."

China has historically kept its budget deficit ratio at or below 3 percent, with recent exceptions being the pandemic-hit years of 2020 and 2021, as well as this year as authorities stepped up efforts to bolster a stuttering economic recovery.

China's government advisers have told Reuters that they would recommend economic growth targets for 2024 ranging from 4.5 percent to 5.5 percent, with the majority favouring a target of around 5 percent - the same as this year.

All three sources who spoke with Reuters after the annual meeting confirmed China was likely to target growth of around 5 percent in 2024.

Investors are scrutinising China's fiscal position more closely after ratings agency Moody's last week slapped it with a downgrade warning, citing costs to bail out debt-laden local governments and state firms and control its property crisis.

Local government debt reached 92 trillion yuan, or 76 percent of China's economic output in 2022, up from 62.2 percent in 2019, International Monetary Fund data showed.

Analysts expect China to reserve some flexibility around its budget deficit next year, in case the economy underperforms.

In October, China unveiled a plan to issue 1 trillion yuan in sovereign bonds by year-end to enhance flood-prevention infrastructure.

They were included in the budget, raising the 2023 deficit target to 3.8 percent of GDP from the original 3 percent.

While economic growth is on track for around 5 percent this year, it compares with a Covid-weakened 2022, and reaching a similar level in 2024 may need heavier fiscal support, analysts said.