China Has Less Fiscal Room Than Many Realize, Barclays Warns

(Bloomberg) -- Expectations of aggressive fiscal policy and tax cuts in China may be misplaced, leaving monetary policy a greater role in supporting the economy, according to Barclays Plc.

"China’s fiscal space is constrained by legacy issues arising from the extraordinarily expansionary policy in the last downcycle, a deteriorating fiscal position, and elevated contingent liabilities, including future pension costs," economists led by Hong Kong based Chang Jian wrote in a note.

"We see risks to our 6.2 percent 2019 GDP growth forecast increasingly titling to the downside and expect monetary policy to shoulder more of the adjustment," they wrote.

Barclays expects another 200 to 300 basis points worth of cuts to banks’ reserve requirement ratios this year, adding to last week’s reduction. It lowered its forecast for the official budget deficit target in 2019 to 2.8 percent of GDP (from 3 percent), with the augmented fiscal deficit which includes other forms of spending like that of local governments to 11.1 percent of GDP.

To boost investment, Barclays expects increased off-budget spending, including higher local government special bond issuance of around 2 trillion yuan ($292 billion) and a re-launch of the special construction fund, which would equate to about 500 billion yuan. Such steps could spur a meaningful recovery in infrastructure investment in the second or third quarter.

China’s policy makers met last month to set their economic plans for 2019, with the budget to be released when leaders gather in Beijing for the National People’s Congress in March. They have pledged to continue "proactive" fiscal and "prudent" monetary policy.

©2019 Bloomberg L.P.