Budget 2010: China's Fiscal Expansion to Continue But with a Shift in Focus

A Balance Between Expansion and Prudence

According to the draft budget report currently under review by the National People's Congress (NPC) at its annual session, the Chinese government is planning 1.05 trillion yuan (US$154 billion) in total deficit in 2010, including 850 billion yuan in central government deficit and 200 billion yuan in local deficit, which represents an all-time high that exceeded last year's planned 950-billion-yuan deficit and actual 740-billion-yuan deficit. As a result, the 2010 budget deficit as a share of China's official planned GDP—calculated based on the 8% official growth target—will be 2.9%, up slightly from the planned 2.8% and the actual 2.2% for 2009. Central government debt as a share of GDP will therefore hit 7.12 trillion yuan, 19.7% of the projected GDP for 2010, although the actual figure could be much larger if taking into account the implicit local government debt that has been accumulating at a stunning pace over the past year.

By keeping the deficit's share of GDP under the 3% threshold, the Chinese government has clearly demonstrated its fiscal prudence. Indeed, fiscal spending for China this year will grow at a much slower pace, 11.4% y/y, almost halved from the 21.2% y/y growth recorded in 2009, as the government expects only 8% fiscal revenue growth in 2010—the same as last year's target but down from 11.7% y/y actual growth for last year. The rather conservative projection for fiscal revenue growth has reflected the government's concern about the sustainability of revenue growth given that much of the increase last year was due to one-off factors such as the hike in tobacco consumption tax, and that tax receipts growth will continue to be restrained by tepid exports recovery as well as continued countercyclical tax cuts and exemptions.

Plenty of Central Stimulus Funds in Pipeline

The draft budget report also reveals that 572.2 billion yuan in stimulus funds have been planned for 2010, which will add to the 607.8 billion yuan already allocated since the final quarter of 2008—including 104 billion yuan in the fourth quarter of 2008 and 503.8 billion yuan in 2009. This will bring the total central stimulus funds in the stimulus cycle from the fourth quarter of 2008 to 2010 to 1.18 trillion yuan, just as planned. The rest of the 4-trillion-yuan stimulus funds under China's fiscal stimulus programme has and will come from local governments, private investors, and financial institutions, among others.

Indeed, the actual amount of stimulus funds available for disposal could be even larger than officially disclosed, as earlier reports suggest that 200 billion yuan in stimulus funds planned for 2009 was stuck in the pipeline, due to delays in the deployment of funds and stimulus projects. This reported about 200 billion yuan in unused stimulus fund could therefore be carried over into 2010, adding to the 572.2 billion yuan in central stimulus funds initially planned for this year. However, this may not necessarily imply that actual stimulus funds for 2010 will approach 800 billion yuan, as the central government can still carry over the extra budget to next year if necessary.

Shift in Budget Allocation

The 2010 draft budget has also shown a clear shift in government spending focus more towards the rural sector and social welfare programmes. The biggest gainer is the rural sector. While central government expenditure is expected to increase at a pace of only 6.3% y/y this year, rural sector spending is projected to rise 14.3% on the year to hit 818.3 billion yuan—which will account for 18.7% of the total central budget, up from 16% in 2009. Education, healthcare as well as social security/employment spending is also expected to rise at a faster pace than the overall central expenditure increase, driving up the combined share of these three items to 15.3%, from 14.9% in 2009. Another item that is receiving a big boost in fiscal support is commercial services, which is to see a 38% y/y increase in central spending this year, as part of the government's efforts to expand domestic consumption, according to the budget report. In the meantime, interest payments for government debt as a share of the total will rise to 3.5%, from 2.9% in 2009, reflecting the greater tax burden of the government as a result of the enlarged deficit spending.

Transport infrastructure, a centrepiece of the stimulus programme, will see a 2.7% y/y decline in central investment, and as a result its share in the total central budget will drop to 4.5%, from 5% in 2009. Another item that will see a marked slump in central budget support is stockpiling of grain, edible oil and other resources (reportedly also including petroleum, non-ferrous metals, and other important materials). Expenditure on these items will drop 4.4% on the year to 107.8 billion yuan, with its share in the total central budget sliding to 2.3% in 2010, from 2.6% in 2009.

Outlook and Implications

China's 2010 budget has reflected a fine balancing act between fiscal expansion and fiscal prudence, as the Chinese government seeks to continue to stimulate growth through fiscal stimuli while minimising the potential fiscal risks associated with deficit spending. As has been well understood, China's swift economic recovery last year was largely driven by fiscal stimuli, as evidenced by the astonishing growth of the heavily government-led transport infrastructure investment as well as the rapid inventory buildup of key resources—which is also part of the stimulus package. While the overall official debt level as a share of GDP remains at the comfortable level of less than 20%, far lower than that in countries such as the United States and Japan, fiscal risks have been accumulating rapidly, particularly on the sub-national level. Lending to local-government-backed financing entities reportedly amounted to 3.8 trillion yuan last year, equivalent to 40% of the entire 9.59-trillion-yuan new lending made by Chinese banks in 2009, according to a research report of the Chinese Academy of Social Sciences, an official think tank. These local-government-backed financing entities, numbering more than 3,800, already had liabilities hitting 5.26 trillion yuan as of June last year, while their assets were valued at 8 trillion yuan.

Even with a record budget deficit, government spending growth this year is to slow down markedly, which will have some impact on overall investment growth—which already started normalising towards the end of last year after skyrocketing in the first three quarters. However, the possible slowdown in public sector investment could be offset by a pickup in private investment, as industrial capacity utilisation rate improves with the rebound of the exports sector and overall demand. Additionally, China's monetary policy, although normalising, is still relatively accommodative compared with prior to the economic crisis, which combined with the generally expansionary fiscal stance will help sustain investment growth at double-digit rates. Finally, the structure of government spending is expected to alter this year in favour of non-transport-infrastructure projects that are designed to address long-standing structural bottlenecks and lift social welfare standards, which in the longer time horizon could probably bring forth greater enhancement of productivity. This is in line with the overall policy goal of the Chinese government this year, which stresses the quality of growth rather than the speed of growth and places greater emphasis on structural adjustment than on GDP growth.