China Should Drop 3% Deficit Limit, Former PBOC Official Says
China Should Drop 3% Deficit Limit, Former PBOC Official Says
(Bloomberg) -- China’s government will need to allow the deficit to rise above the long-standing limit so it can cut taxes and boost investment to counteract the fallout from the coronavirus, according to a former central bank official.
The government is expected to shift to a more aggressive stimulus mode as rising unemployment domestically and weak demand overseas will weigh on the economy, Sheng Songcheng, a former director of the People’s Bank of China’s statistics and analysis department, said in an interview last week. He was speaking before the release of data showing a deep contraction in activity in the first two months of the year.
“In this round of stimulus, fiscal policy will take the lead, while monetary policy will be supplementary,” Sheng said, adding that the implicit cap on the deficit at 3% of gross domestic product will be abandoned to make room for more spending.
Supporting economic activity and employment will have to be balanced with the government’s long-standing goal to control debt. While the government and central bank have been using targeted measures this year to support growth, there’s no sign they want to repeat the massive stimulus program after the global financial crisis in 2008, which led to a huge expansion of debt and a property bubble.
Achieving this year’s growth target remains a “hard constraint” for policy makers, according to Sheng, who’s now a university professor and an adviser to Shanghai’s government. To meet the broad goal of doubling the economy by the end of this year, from its size in 2010, the economy needs to expand by at least 5.6% this year, Sheng estimates. And that means the spending cap needs to go, he said.
“It’s getting more difficult to realize the target now in the virus circumstances” as the contribution to growth from net exports will be uncertain and people are seeing “stealth unemployment,” where they work less days in a week and get paid less than usual, Sheng said.
China’s top leaders have kept their official deficit target below 3% of GDP since at least 2009. The real deficit is higher, but the target is a symbol of the government’s aim to control borrowing. Governments at all levels use off-balance sheet borrowing to get around the limit, a problem that S&P Global Ratings said may re-emerge this year.
The world’s second-largest economy is almost certain to contract in the first three months of 2020 after the deep drop in activity January and February.
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With assistance from Bloomberg