China targets 'proactive' fiscal policy

China, with more forceful countercyclical adjustments in mind, will steer toward "very proactive" fiscal policy this year — including increasing the deficit-to-GDP ratio and issuing larger-scale government bonds, and will "front-load" its fiscal firepower to better underpin a positive economic growth trajectory, Vice-Minister of Finance Liao Min said on Friday. 

As China navigates the everchanging domestic and international landscapes, policymakers are well-equipped with "ample policy space and a diverse tool kit", Liao said at a news conference, stressing that the country will resort to policy reserves should new circumstances call for them.

"Given the steady growth in China's GDP, the increase in the deficit ratio will translate into a substantial expansion of the overall budget deficit, allowing for a further increase in total fiscal expenditures and a more forceful implementation of countercyclical adjustments," Liao said.

Liao added that the specific figure will only be disclosed after going through the necessary legal procedures. Analysts estimate the deficit-to-GDP ratio might be as high as 4 percent.

In the face of a property market that still seeks a solid footing in its recovery, and uncertainties clouding the export sector due to rising global protectionism, leveraging potent fiscal tools to boost domestic demand is vital for sustaining the country's growth momentum, said Luo Zhiheng, chief economist at Yuekai Securities.

To this end, a deficit target of as high as 4 percent of GDP, according to Luo, could be considered this year, up from the current 3 percent goal set for 2024.

China's ratio is considerably lower than that of major economies and emerging markets, pointing to an overall sound and sustainable fiscal position. And government debt is backed by a substantial amount of high-quality assets that generate both social and economic returns, said Liao.

In particular, China's current real interest rate on government debt is notably lower than the country's actual economic growth rate, further indicating the country's sizable debt tolerance capacity and scope for deficit expansion, Liao added.

"With the rising deficit ratio, we anticipate a notable expansion in bank credit and social capital investment, which will in turn promote a significant increase in effective domestic demand," he said.

Liao also made it clear that the country will expand the scale of government bond issuances, including ultralong special treasury bonds and local government special-purpose bonds.

The scale of ultralong special treasury bonds is expected to be expanded from 1 trillion yuan ($136.38 billion) in 2024 to around 1.5 to 2 trillion yuan this year, to better support the country's large-scale equipment upgrades and consumer goods trade-in initiatives, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

The new issuance of local government special-purpose bonds this year is expected to expand from 3.9 trillion yuan in 2024 to around 7 trillion yuan, including a 2.8 trillion yuan debt swap quota, Wang said.

Local authorities will be permitted to direct special-purpose bonds toward the purchase of land reserves, as well as the acquisition of existing commercial properties for the purpose of providing affordable housing, said Lin Zechang, head of the ministry's comprehensive department.