China Advised to Keep an Eye on Fiscal Deficit

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Last updated at: (Beijing Time) Friday, December 27, 2002

China Advised to Keep an Eye on Fiscal Deficit

China has to turn to a continuous expansionary fiscal policy to rev up and maintain its economic growth. But the question is how long the fiscal syringe can last.

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China has to turn to a continuous expansionary fiscal policy to rev up and maintain its economic growth. But the question is how long the fiscal syringe can last.

With the 150 billion yuan (US$18.14 billion) treasury bonds in the 2002 fiscal year coming into place, China's budget deficit will shoot up year on year by 19.24 percent to 309.8 billion yuan (US$37.46 billion), or 3 percent of the gross domestic product (GDP), an internationally recognized alarm level.

For the first time, China's fiscal deficit has touched such a level since the country started its reform and opening-up in 1978.

"The Chinese government is now standing in hot water, fighting a tough battle with the looming deflation," Zhao Xiao, a researcher with the State Economic and Trade Commission, said in his signed article published in the Beijing-based China Business Times.

The rising fiscal deficit results mainly from the big sum of spending used for countering the sluggish domestic consumption, according to Zhao.

China seems to have fallen prey of an irksome deflation beginning in 1996 after it accomplished a praiseworthy "soft-landing" out of the sizzling macro-economy during 1993-94.

Characterized by the declining prices and consumers' cautious buying sentiment, a mild deflation has risen as the policy-makers' arch-foe since then, pressing the central government to take a proactive fiscal orientation.

In 1996-97, the fiscal deficit of China stood at 0.78 percent of the GDP.

But after it embarked on an expansionary fiscal road in 1998, the deficit level rocketed all the way to 2.8 percent in the year 2000, and will finally exceed 3 percent by the end of this year, Zhao said.

Compared with the deficit level in 1997, the total deficit size will more than double in 2002, up 27 percent per year on average, he said.

"This is surely not a sustainable economic growth," he said. "China is running toward a 'fiscal deficit trap'."

Worse than that, if taken into account the non-performing assets in the State-owned commercial banks and the central and local governments' hidden debts to the weak national social security network, the comprehensive deficit of China should be at least over 70 percent of its GDP, far exceeding that of even most developed countries, which is usually around 60 percent.

But the Chinese Central Government does not seem to concern too much about the rocketing fiscal deficit.

At the Central Economic Work Conference held early this month, the Central Committee of the Communist Party of China still chose a proactive fiscal policy, together with a stable monetary policy, as the keynote of China economic arrangements in 2003.

The Central Government has so far issued a total of 660 billion yuan (US$79.8 billion) worth of long-term treasury bonds and plans to release another 140 billion yuan (US$16.9 billion) in bonds next year.

A government's fiscal deficit is in nature to spend today the money allocated to tomorrow.

As long as the government can be sure that tomorrow will be better than today, nothing is too serious. The key is to ensure that today's spending is wise and efficient enough to produce profit for tomorrow.

Of this, the Chinese Government appears to have reason to feel confident.

The National Bureau of Statistics said that China's GDP will grow by 8 percent this year, hitting the threshold size of 10 trillion yuan (US$1.2 trillion).

The Chinese Academy of Social Sciences and the Development & Research Center under the State Council, both governmental think tanks, all predict another around 8 percent GDP growth next year.

But the Central Government would rather take a wary footing.

Financial Minister Xiang Huaicheng declared Wednesday that the central finances will not support a penny more for any "image-polishing project", the program to publicize the administrative performance, launched by governments at all levels.

"To practice strict frugality and stop waste is the key content for next year's financial work," he said.

By PD Online Staff Forest Lee

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