Analysis: China to choose fiscal muscle over major reforms to revive economy

BEIJING, Oct 24 (Reuters) – China is set to unleash a new fiscal stimulus to boost its economic recovery, using a well-used playbook that relies heavily on debt and state spending but falls short of growing deep reforms. Number of inspectors.

Some government advisers are recommending China raise its 2024 budget deficit target beyond 3% of gross domestic product (GDP) for this year, which would allow Beijing to issue more bonds to revive the economy, policy insiders and economists told Reuters.

The world’s second-largest economy grew faster than expected in the third quarter, boosting Beijing’s chances of meeting its growth target of 5% for 2023.

But while the upbeat surprise may bring some joy to beleaguered Chinese investors, there are deep concerns about the continued destruction of private sector activity and the lack of long-term reforms needed to shift the economy toward consumer-led growth.

For now, the focus is on sustaining a weak recovery to avoid economic disaster.

„We need to make good preparations for next year and implement policies to stabilize growth. The foundation of economic recovery is not solid,” said an adviser to the cabinet, speaking on condition of anonymity.

„For next year, we still need to set a 5% GDP growth target.”

China’s parliament is expected to approve up to 1 trillion yuan ($137 billion) in additional sovereign debt issuance when it wraps up a five-day meeting that began on Oct. 20, sources told Reuters.

Such bonds will be used to finance water conservation and flood prevention projects and will come on top of the expected front-loading of the 2024 local bond allocation.

Calls for Ambition

China’s weak post-pandemic recovery has exposed growing structural constraints and raised a sense of urgency around reforms to put growth on a more sustainable footing.

The debate over economic policy in China has heated up in recent months, with some government advisers advocating reforms to unleash new growth engines beyond property and infrastructure investment.

Those favoring structural reforms focus on policies that encourage urbanization and housing spending, reduce reliance on investment and level the playing field between state-owned enterprises and private enterprises.

Without such changes, economists warn, China could slide into a long period of deflation and stagnant growth that fails to raise the living standards of the country’s 1.4 billion people.

However, near-term demands have largely overshadowed calls for politically ambitious reforms, with authorities instead increasing fiscal and monetary support.

Local governments have been told to complete by September the issuance of 3.8 trillion yuan in special local bonds for 2023 to finance infrastructure.

Some advisers say the central government has room to spend more because its debt is only 21% of GDP, much lower than the 76% for local governments.

„Fiscal policy should play an even more leading role next year,” said Xu Hongkai, deputy director of the Economic Policy Commission of the state-backed Chinese Association for Policy Sciences.

„Next year, real growth may be less than 5%, but it cannot be too low, otherwise some problems such as employment and income will still strike,” Xu told Reuters.

The central bank, which has offered moderate interest rate cuts and pumped more money into the economy in recent weeks, has been constrained in how much it can ease monetary policy for fear of triggering capital flight and hurting the yuan, analysts said.

„There is still room to lower interest rates and reserve requirement ratios, but there is a question of sustainability,” said Guan Tao, global chief economist at BOC International and a former official at the State Administration of Foreign Exchange (SAFE).

However, policy insiders believe that further fundamental changes, particularly the revival of market-based reforms, will be limited due to the political environment in which the government has increased its control over the economy, including the private sector.

An expected Communist Party plenum, likely to take place in November and traditionally focused on reforms, may disappoint people expecting major changes.

„We need to push for reforms as many of the problems are structural, but implementing reforms is difficult and requires political will,” said a policy insider.

($1 = 7.2987 Chinese Yuan)

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