China spent hundreds of billions of dollars on programs to boost economic activity last year, including major infrastructure projects and sums of money for its citizens.
That amount of spending is unlikely to carry over into 2021. China has long been wary of increasing its debt burden, a concern some analysts suspect authorities will cut fiscal aid this year.
“The budget deficit is likely to be reduced in 2021 to ensure sustainability while avoiding a fiscal cliff,” Standard Chartered analysts wrote in a research note this week. They estimate that China’s budget deficit will have widened to 8.6% of GDP in 2020, up three percentage points from a year earlier.
A balanced recovery
Like other countries, China needs to figure out how to balance the need for at least some extra stimulus as the recovery continues with a growing debt burden.
After all, last year’s growth rate was still the lowest in decades in China. And there are some weaknesses in the economy: retail sales, for example, have lagged, suggesting people are still reluctant to spend as the country struggles to eradicate Covid-19 outbreaks completely.
Larry Hu, chief of Chinese economics at Macquarie Group, said he expects infrastructure spending to slow to 2% from last year’s 3.4%. He also suspects that local governments will be less likely to issue specialty bonds, a form of spending primarily used to build infrastructure projects, including 5G networks, railways and airports.
But he doesn’t think Beijing will be too aggressive about curtailing fiscal stimulus – a sentiment echoed by some in Beijing recently.
Chinese leaders have promised there will be no dramatic changes in economic policy this year.
“We are facing a paradox,” said Ma Jun, policy maker at the People’s Bank of China, at an economic conference in January. “We have to change our monetary policy, but it cannot go too quickly.”
Other Challenges
Guo also warned that bad loans could continue to pose risks to the financial system, slowing the pace of the recovery.
A slew of major state-owned companies have either declared bankruptcy or defaulted on loans in the past year – a worrying trend for an industry that Chinese President Xi Jinping has sought to bolster as a key driver of economic activity and innovation. According to recent estimates by Jinan-based Zhongtai Securities, the number of state-owned company defaults rose in 2020 to $ 15.5 billion by 2020, up 220% from the previous year.
China also has other challenges.
By not setting a GDP target, some experts – including Yang Weimin, former Secretary General of the National Development and Reform Commission – have argued that China may be losing the guidelines it needs to set itself to sustain its growth . But others, including central bank policymaker Ma, have warned that overly ambitious goals could encourage local governments to over-borrow, increasing the risk of ‘hidden’ debt.