China spent hundreds of billions of dollars last year on programs to stimulate economic activity, including major infrastructure projects and cash donations to its citizens.
That amount of spending is unlikely to be carried over to 2021. China has long feared to increase its debt, a concern that some analysts suspect will lead authorities to reduce fiscal support this year.
“The budget deficit is likely to be cut in 2021 to ensure sustainability and, at the same time, avoid a fiscal chasm,” Standard Chartered analysts wrote in a research note this week. They estimated that China’s fiscal deficit widened to 8.6% of GDP in 2020, an increase of three percentage points over the previous year.
A balanced recovery
Like other countries, China needs to figure out how to balance the need for at least some additional stimulus as the recovery continues with a growing debt burden.
After all, the growth rate last year was still the slowest in China in decades. And there are some weaknesses in the economy: retail sales have declined, for example, suggesting that people are still wary of spending money as the country struggles to completely eradicate Covid-19 outbreaks.
Larry Hu, China’s chief economist at the Macquarie Group, said he expects the rate of spending on infrastructure to drop to 2% from 3.4% last year. He also suspects that local governments will issue fewer special bonds, a form of spending used primarily to build infrastructure projects, including 5G networks, railways and airports.
But he doesn’t think Beijing will be too aggressive about restricting the fiscal stimulus – a sentiment that has recently been echoed by some in Beijing.
Chinese leaders have promised that there will be no dramatic changes in economic policy this year.
“We are facing a paradox,” said Ma Jun, a policy maker at the People’s Bank of China, during an economic conference in January. “We need to change our monetary policy, but it can’t be too fast.”
Other challenges
Guo also warned that non-performing loans may continue to pose risks to the financial system, which could slow the pace of recovery.
A number of large state-owned companies declared bankruptcy or defaults on loans last year – a worrying trend for an industry that Chinese President Xi Jinping wanted to boost as one of the main drivers of economic activity and innovation. Defaults by state-owned companies rose to $ 15.5 billion in 2020, an increase of 220% over the previous year, according to recent estimates by Jinan’s Zhongtai Securities.
China also has other challenges.
By failing to set a target for GDP, some experts – including Yang Weimin, the former secretary general of the National Development and Reform Commission – argued that China may be losing the direction it needs to keep its growth on track. But others, including the central bank’s policy maker, Ma, have warned that overly ambitious targets can encourage local governments to borrow too much, increasing the risk of accumulating “hidden” debt.