China Fiscal Easing To Under Pin 2024 Growth
Bottom line: China has boosted the official budget deficit from 3.0% to 3.8% to fund local government infrastructure investment. This will mainly feed in for 2024 and is designed to underpin growth for 2024 rather than 2023. IMF fiscal numbers show that the fiscal space for China is only moderate in the future, which mean follow-through action only with further major growth disappointments.
Figure 1: China Primary and Overall Budget Deficit/GDP (%)
Source: IMF/Continuum Economics
The Yuan1trn increase in the 2023 budget deficit is to be channelled to increased local government spending on infrastructure including disaster reconstruction and prevention. Though officially the target is to spend 50% of this in 2023, it is more likely that the bulk of this will come through in 2024. In itself this could add 0.4-0.6% to 2024 GDP. It does show that China authorities are keen to underpin growth in 2024, as the 5.0% growth target for 2023 is assured outside of an unexpected disaster in Q4 (here). This reduces the probability of our downside economic scenario from 20-30% (here) to around 15-20%, even if the residential property downturn is a bigger drag on GDP in 2024. However, we are keeping the baseline 2024 forecast at 4.0% for now, as we want to see more economic data before the December Outlook. Additionally, the residential property market has not recovered sustainably and remains weak, despite targeted government measures as confidence requires aggressive change that is unlikely e.g. abandoning the three red lines policy. We are also apprehensive that the effects of the property downturn could be underestimated.
Meanwhile, though the official central government budget deficit is now 3.8% rather than 3.0%, the IMF wider general government deficit was estimated at 7.1% of GDP before the latest change in fiscal policy. Indeed, the underlying fiscal position in the IMF data remains weak (Figure 1) and is on a sharp rise debt trend (Figure 2). Since the 2015 crisis, China has been running increasingly large overall and primary budget deficits/GDP and the current projections are that China will have a budget deficit in the 6-7% area
Figure 2: China Gross Government Debt/GDP (%)
Source: IMF/Continuum Economics