Mar 06, 2018 08:05 PM

Don’t Read Much Into China’s Lower Deficit Target, Analyst Says

China has set a lower target for its deficit-to-GDP ratio for 2018, dropping it to 2.6% from 3% in 2017, surprising some observers with the first reduction since 2013.

However, research firm Capital Economics pointed out that the Chinese government has been reducing fiscal support since late 2016.

“We wouldn’t read much into the precise number,” Capital Economics said in an analysis note on Monday, after Premier Li Keqiang revealed in the government’s work report at the opening of the National People’s Congress (NPC), the country’s legislature, that the government aims to lower its deficit-to-GDP ratio in 2018, while keeping the value of the shortfall unchanged at 2.38 trillion yuan ($375.1 billion).

China’s official fiscal budget does not include significant amounts of spending, including spending via government-managed funds and local government financing vehicles. In any event, the government can shift money in and out of the funds to help final budget numbers get close to the initial projection, the research firm said.

Capital Economics has added the omitted spending back to the budget deficit, which showed a different pattern of fiscal support over recent years. “Our estimate suggests that the officials have been reducing fiscal support since late 2016,” it said. “As such, the narrowing of the deficit in today’s projection is not really a new development.”

The reduction of the deficit target does not mean that fiscal policy is simply tightening, as the government has pledged tax cuts and has increased the projected amounts of local government-issued special bonds whose returns are derived from the earnings of investment projects, CEBM Group, a subsidiary of Caixin Insight Group, said in a note.

According to the government work report, China has lowered the spending target for railway construction to 732 billion yuan this year, down from 800 billion yuan in 2017. In addition, the government will raise the health care subsidy for every qualified resident to 490 yuan from 450 yuan. These figures show that the government is continuing with its structural economic reforms, CEBM said.

GDP and employment

China set its gross domestic product (GDP) growth target for 2018 at “around 6.5%,” the same as 2017, without mentioning the statement of “higher if possible in practice” as it did last year, when some were still concerned about the country’s immediate growth prospects.

The change signals that rapid economic growth remains a priority, and China’s desire to sustain rapid growth implies that stimulus might resume when needed, most likely in the form of an interest rate cut, Capital Economics said.

The research firm assumes that growth in the official figures will be in line with the target, which means growth of at least 6.3%. That is the minimum average annual growth rate from 2018 to 2020 needed to meet the government’s goal of doubling GDP from 2010 to 2020.

China aims to keep the surveyed urban unemployment rate, which covers urban residents as well as rural migrant workers, within 5.5% in 2018. It is the first time that the government has used this indicator as a projected target — a sign it is improving its statistical system, CEBM said.


Contact reporter Lin Jinbing (
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