The China National People's Congress (NPC) meeting might give certain upside surprise in fiscal policy. The NPC is expected to stress on a more "proactive" fiscal policy in 2016 with above expected fiscal deficit recorded in 2015 and the Chinese government's intentions to finish the local government debt swap scheme in two years.
China's fiscal policy stance has relatively been prudent in terms of central government deficits since the huge stimulus package in 2009-2010. However, the scene is different at a local government level, with high growth rates in spending boosted by land transfer revenues and huge amounts of LG off-balance sheet financing. Even though the total public debt was lesser than 50% of GDP in 2015, the LG debt swap scheme size is significant.
"In 2015, we estimate that the general government deficit widened to 3.4% of GDP, well above the budgeted deficit (-2.3%)", says Barclays.
The wider fiscal deficit was mainly due to a sharp increase in government spending that rose 13.2% y/y on rising transfers from the central government. Capital expenditure also increased. FAI-related spending increased to 29% of total general government spending, an increase from earlier years' 26-27%. This indicates additional state support for growth, mainly in infrastructure investment.
"Looking ahead, we expect fiscal policy to be moderately expansionary during 2016-17 with the general government deficit staying around 3.5% of GDP", says Barclays.
However, it is unlikely that increased government spending can overcome the slowing trend of GDP growth due to the persistent headwinds from destocking, capacity reduction and deleveraging. Furthermore, a nearly unchanged general government deficit as percentage of GDP is not expected to considerably boost the economy assuming the same elasticity of fiscal balance to GDP in future.
