China’s Fiscal Coffers Are Depleted Just as Virus Spurs Spending

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China’s provinces are facing the economic fallout from the coronavirus with depleted ammunition, given they were already bracing for a deterioration in public finances before the outbreak hit.

More than half of mainland provinces expect slower expansion of revenue in 2020 than last year’s average local income growth, according to their budgets published before the disease outbreak became widespread in January. Hubei, the epicenter, was already expecting income to fall.

That stretches the government’s efforts to make fiscal policy more supportive of the economy in the aftermath of the outbreak, and means more bond sales and borrowing are likely. Government at all levels is re-thinking plans for this year as factories and businesses across the country remain shut, spelling immediate trouble for tax receipts.

“Given the current downward pressures on economic growth, it would be really hard, and unreasonable, to try to meet fiscal targets set before the crisis broke out,” said Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong.

China hasn’t exceeded a national deficit ratio of 3% of gross domestic product since at least 2009. The official target would normally be announced after the National People’s Congress, China’s legislature, in March. On Sunday the government pledged to roll out more effective stimulus, with Finance Minister Liu Kun writing in a Communist Party journal that it will work to reduce corporate taxes and cut unnecessary government expenses.

Broad Weakness

Among the 28 provinces that have published their 2020 budgets, worsening balances are evident across the board. Mega-cities like Beijing and Shanghai expect their revenue to be “roughly the same” as in 2019, and regional economic powerhouses such as Shandong and Chongqing expect growth of about 1%. Anhui, in central China, forecasts a slump of 17.5% while Hubei originally thought its income would drop by about 13%.

What Bloomberg’s Economists Say..

“The cost of dealing with the coronavirus and hit to tax revenue as China’s economy slumps are likely to strain some provinces more than others. Most at risk to added fiscal pressure — the western provinces, where defaults by local government financing vehicles and state-backed firms in 2019 underlined stress even before the virus outbreak.”

Qian Wan, Bloomberg Economics

For the full note and provincial debt risk heatmap click here

The national budget for this year hasn’t been announced yet, but revenue last year was lower than initially forecast.

To what extent tax income will slow on the damage from the virus is difficult to tell. Although the SARS outbreak in 2002-2003 had much smaller economic impact than this one, government revenue took an immediate hit in the first quarter of 2003 as the virus raged, and kept falling in the rest of the year.

Analysts are divided about how the shortfalls will be addressed. While economists from Citigroup Inc. to China’s largest brokerage house Citic Securities Co. said officials have to accept a deficit bigger than 3% of China’s gross domestic product, others from Standard Chartered and Goldman Sachs believe that remains politically unpalatable.

Red Line

China’s top leaders have kept their official deficit target below 3%, partly through belt-tightening, as a gesture to deter excessive borrowing as the nation fights debt on multiple fronts. Yet it has also given way to all types of off-balance sheet borrowing, a problem S&P Global Ratings said may re-emerge this year.

Signs of more proactive fiscal policy have already appeared. The Ministry of Finance allowed local governments to sell more than 1.8 trillion yuan ($258 billion) of debt before the annual budget has been approved. The ministry has also announced targeted tax cuts to help companies and households hit by the virus, partially waived social security premiums or delayed taxes.

“Fiscal policy ought to be counter-cyclical, and the tension between revenue and expenditure shouldn’t be a reason to constrain it,” said Xu Gao, chief economist at BOCI Securities Ltd. in Beijing. “The government should increase the fiscal deficit to cope with the virus, and ease spending pressure by selling more debt.”

— With assistance by Yinan Zhao, and Jing Zhao

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