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This is a 180-degree turn from the communist leadership: Beijing had previously said that large fiscal stimulus should be avoided so as not to increase the budget deficit. This unexpected move highlights growing concerns about the world’s second-largest economy. According to Bloomberg, the official announcement could be made later this month, although negotiations are still ongoing and plans are subject to change.
The proposal to increase the budget deficit only confirms what has been possible to guess: the Chinese leadership is also aware of the structural problems afflicting the economy, and these are also real problems, in contrast to Beijing’s denials so far.
Potential additional debt issuance led by the Chinese Ministry of Finance and the National Development and Reform Commission could provide financial support to the economy, enabling a stronger and faster recovery.
China has so far aimed to keep its official budget deficit below 3% of GDP, with the exception of private bonds or debt raised by local government financing instruments, which are not classified as public debt. However, amid budget tensions as the economy slows, economic actors are increasingly demanding an extension of this limit.
Current discussions are subject to final approval by the State Council and lawmakers. Although the size of the proposed issuance may be considered modest, it could send a positive message, especially in light of weak private demand, limited local government budgets, and the contraction in the real estate sector.
The Chinese government has recently implemented several stimulus measures, including easing interest rates, increasing liquidity in the banking system, and supporting real estate sales and household consumption. Despite initial signs of improvement in some sectors, the overall economic outlook remains uncertain.
Economists revised their growth forecast for this year to 5%, in line with China’s annual target set in March. A further slowdown in growth could put further pressure on the country’s currency and financial markets, leading to capital outflows and increased economic challenges, including concerns about unemployment.
Cover image source: Getty Images.
