China spent hundreds of billions of dollars last year on programs to stimulate economic activity, including major infrastructure projects and cash outreach to its citizens.
The amount of expenditure is unlikely to be carried over to 2021. China has long been wary of raising its debt burden, which some analysts suspect the authorities will reduce fiscal support this year.
“The budget deficit is likely to be reduced in 2021 to ensure sustainability while preventing a fiscal cliff,” Standard Chartered analysts wrote in a research note this week. They estimated that China’s fiscal deficit would increase to 8.6% of GDP in 2020, an increase of three percentage points from a year earlier.
A balanced recovery
Like other countries, China needs to figure out how to balance a need for at least a little extra stimulus as the recovery continues. with a growing debt burden.
After all, the growth rate last year was still the slowest in China in decades. And there are some weaknesses in the economy: retail sales, for example, have lagged behind, suggesting that people are still wary of spending money as the country struggles to completely eliminate the Covid-19 outbreaks.
Larry Hu, head of China Economics at Macquarie Group, said he expects infrastructure spending to decline to 2% from 3.4% last year. He also suspects that local governments will issue less special effects, a form of spending used primarily to build infrastructure projects, including 5G networks, railways and airports.
But he does not think Beijing will be too aggressive about curtailing fiscal stimulus – a sentiment recently reflected by some in Beijing.
Chinese leaders have promised that there will be no dramatic changes in economic policy this year.
“We are facing a paradox,” said Ma Jun, a policy maker at the People’s Bank of China, during an economic conference in January. “We need to shift our monetary policy, but it can not be too fast.”
Other challenges
Guo also warned that bad loans could continue to pose risks to the financial system, which could slow the pace of recovery.
A number of large state-owned enterprises have declared bankruptcy or defaulted on their loans in the past year. This is a worrying trend for a sector that wanted to strengthen Chinese President Xi Jinping as a key driver of economic activity and innovation. The defaults by state-owned enterprises rose to $ 15.5 billion in 2020, 220% higher than the previous year, according to recent estimates by Zhongtai Securities in Jinan.
China also has other challenges.
By not setting a GDP target, some experts – including Yang Weimin, the former Secretary-General of the National Development and Reform Commission – have argued that China may be losing the leadership it needs to give itself to its to move growth. But others, including central bank policymaker Ma, have warned that targets that are too ambitious could encourage local governments to borrow too much, increasing the risk of building up “hidden” debt.