China: A Second Half Fiscal Bump

Published on July 27, 2016

Key Takeaways:

China’s Central Financial Leading Group agreed last week to revise its original H2 fiscal spending plan upwards, by 300 billion Yuan.

The CFLG also approved up to another 3 trillion yuan in local government bond issuance and at least 1.8 trillion in debt-for-bond swaps for H2 2016, a modest slowing from the first half, but a sharp increase over 2015.

The central government will increase planned spending on social projects and housing subsidies, while drawing on higher revenues to fund tax cuts for businesses.

July 27, 2016

Although all eyes have been on Japan’s efforts to jump-start its economy, the senior leadership across the East China Sea has also been quietly putting together a plan to accelerate fiscal stimulus spending to provide a further modest bump to Chinese GDP growth for the second half of 2016.

China’s Central Financial Leading Group agreed at a meeting last week to pursue a more proactive fiscal policy, with an increase in spending along with stepped up efforts to promote effective investments and a stable economy for the second half of the year.

*** The CFLG approved fiscal expenditures of 9.9415 trillion yuan for H2 2016, an increase of 300 billion yuan, or a roughly 0.4% of GDP bump, over the 9.6415 trillion yuan expenditure originally proposed for H2. ***

*** That new level of spending will now represent a 1.025 trillion yuan increase over the actual fiscal expenditure of 8.9165 trillion yuan in H1 2016, and a 309 billion yuan increase from the 9.6325 trillion yuan of fiscal expenditure in H2 2015. ***

*** The CFLG also approved an increase of more than 20% in H2 2016 fiscal spending on key projects in urban and rural development, social security and employment, public hospitals and community-level health care institutions, education, science and technology, and urban sewage treatment facilities, as well as on housing renovation and worker resettlement projects. ***

Issuance and Debt Swaps

On Thursday, July 14, China’s Central Financial Leading Group held the second of eight summer meetings to formally review the central government’s fiscal budget and government debt for the first half of 2016, and to adjust them accordingly for the second half.

At the meeting, the CFLG increased its H2 spending target by 300 billion Yuan, approving fiscal expenditures of 9.9415 trillion yuan for H2 2016, 309 billion Yuan higher than H2 2015 spending, and over 1 trillion Yuan higher than H1 2016 expenditures.

The meeting also approved in principle the issuance of a maximum of 3 trillion yuan of local government bonds in H2 2016, including at least 1.8 trillion yuan in debt-for-bond swaps intended to help clear the debt overhang at the local level.

To put that in context, local governments issued a total 3.58 trillion-yuan worth of debt in H1 2016. That was only 200 billion yuan shy of the local issuance of 3.8 trillion yuan for all of 2015. Debt-for-bonds swaps and newly issued bonds accounted for 2.7 trillion yuan and 894 billion yuan of that issuance in H1, 2016 respectively.

Social Programs and Spending

The meeting also approved an increase of more than 20% in H2 2016, about four percentage points higher than the 16.2% increase in H1 2016, for fiscal spending on key projects in urban and rural development, social security and employment, public hospitals and community-level health care institutions, education, science and technology, and urban sewage treatment facilities.

The CFLG urged all levels of local government to continue to increase spending in H2 2016 despite restrictions on local governments being allowed to increase the size of their fiscal deficits.

Including local spending, the growth rate of fiscal spending nationwide is expected to remain around 15% in H2 2016, almost unchanged from the 15.1% in H1 2016. That is in contrast to 2015, when China’s actual fiscal spending grew 13.2% from a year earlier.

The CFLG stressed that although fiscal revenue will grow slowly in H2 2016, all levels of local government should continue to expand spending on sectors directly linked to people’s livelihoods, such as on affordable homes, reducing overcapacity, and the resettlement of workers.

To support those efforts, the central government budget will allocate a total of 30 billion yuan to be used in H2 2016 to set up tiered awards and subsidies for eligible worker resettlement projects by local governments and central government enterprises. That compares to 20 billion yuan allocated in H1 2016 for that purpose by the central government.

The government is also planning to renovate 6 million housing units in run-down urban areas, and 3.14 million dilapidated houses in rural areas, in 2016.

Fiscal Revenue and Business Tax Cuts

According to government estimates, China’s fiscal revenue rose 7.1% from a year earlier in H1 2016; 0.5 percentage points higher than the 6.6% growth pace registered for the same period last year. Total fiscal revenue for the first half was recorded at 8.55 trillion yuan, meeting 54.4% of the 15.72 trillion yuan target for 2016.

Out of the 8.55 trillion yuan, 3.7164 trillion yuan was collected by the central government, up 3.3% from a year earlier, while local revenue amounted to 4.8350 trillion yuan, up 10.1% from the same period last year.

Chinese officials predict the country’s fiscal revenue will increase by about 4% above target, to over 7.5 trillion yuan, in H2 2016.

Out of that 7.5 trillion, they expect the central government’s fiscal revenues to grow by 3%, reaching about 3.3 trillion yuan in H2 2016, and the local governments’ fiscal revenue to rise by 5%, to reach 4.2 trillion yuan.

The central government has made supply-side reform an economic priority, and so tax cuts to lower costs for businesses will be a major policy option, putting pressure on revenue growth in the second half of the year.

The Ministry of Finance predicts that the country’s total fiscal revenue will thus increase about 5.5-6%, to reach around 16 trillion yuan, this year.

 

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