A big fall in Chinese fiscal spending near year-end

Fiscal drag has been a major concern in the analysis of China's growth outlook this year. A key event was the fiscal reform announced in 3Q14, which allowed for issuance of local government bonds but will gradually discontinue funding via local government financial vehicles (LGFV). As a result, a local government funding shortage created significant fiscal drag in the first eight months of 2015. 

First, the 100 billion yuan increase in local government bond issuance this year was too small to offset the funding drop-off from the new rule on LGFV financing. Second, land sale revenues collapsed 38.4%oya in the first eight months of the year, well beyond the government forecast of a 4.7% decline. Third, the key offsetting funding initiative, public-private partnerships (PPP), was a major disappointment. Of the 2 trillion yuan in PPP projects the government announced in March, the media report that less than 20% were started by September. 

Fiscal policy has turned more active since mid-3Q. In one noticeable change this year, spending has been frontloaded significantly. Between July and October, spending surged 28% compared to the same period of last year, lifting year-todate fiscal spending 18.2%oya by October. And the fiscal deficit through October reached 530 billion yuan, compared to a 609 billion yuan ytd surplus in October 2014.