China’s fiscal situation is “extremely severe with risks and challenges”, former finance minister Lou Jiwei has warned, citing fallout from aggressive US stimulus policies, the global economic slowdown during the pandemic, an ageing Chinese population and mounting domestic local government debt.
Lou offered his sharp critique in December but the assessment has only been made public more recently, with just days to go now before China’s political elites meet for their annual legislative session to decide the details of economic policy.
Among the big issues will be whether to scale back the fiscal stimulus implemented last year to combat the impact of the coronavirus pandemic, and instead focus on curbing rising debt risks. Beijing is expected to cut back fiscal stimulus even as Washington closes in on approval for an additional US$1.9 trillion in economic stimulus proposed by President Joe Biden.
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The fiscal difficulties are not only a near-term or short-term issue, but also will be serious in the medium term
Lou, who served as China’s finance minister from 2013 to 2016, warned that the country’s fiscal revenue was expected to be stuck at “a low level” in the coming five years, with no sign of the government cutting back its spending.
“The fiscal difficulties are not only a near-term or short-term issue, but also will be serious in the medium term,” said Lou, who is known for his outspoken views.
Lou’s remarks were contained in a speech delivered in December but only published in February by a magazine affiliated with the Ministry of Finance.
Lou charged that the United States was monetising its budget deficit to transfer its debt burden to the rest of the world, especially to developing countries like China.
To finance its large and growing budget deficit, the US government has had to issue increasingly large amounts of Treasury bonds. In addition, the Federal Reserve had bought large amounts of those bonds to inject liquidity into the market – so-called quantitative easing – with the additional cash rapidly pushing up the prices of stocks and other financial assets to levels far beyond those justified by economic fundamentals, Lou said.
Lou cited the International Monetary Fund projection that the aggregate government debt of advanced economies accounted for 123.9 per cent of their collective gross domestic product in 2020, breaking the previous historical high recorded at the end of World War II.
Lou’s comments were published as the US House of Representatives voted early on Saturday morning to approve the Biden administration’s US$1.9 trillion pandemic relief package, which includes direct aid to small business and US$1,400 cheques to middle-class Americans.
On Thursday, US Federal Reserve chairman Jerome Powell reaffirmed that the central bank had no plans to tighten monetary policy until it had seen a sustained improvement in employment.
Once the pandemic has been brought under control and the [global] economy begins to recover, fiscal and monetary policies will make a turn that will impact on global financial stability and the economic growth of various countries
He expressed no concern at the prospect of rising inflation and rising asset prices.
But Lou warned that the US view was short-sighted.
“Once the pandemic has been brought under control and the [global] economy begins to recover, fiscal and monetary policies will make a turn that will impact on global financial stability and the economic growth of various countries,” Lou said.
“Emerging market countries are facing a double blow to both their economies and finances, with the economic risk transforming into fiscal and financial risks, raising the risk of a debt crisis.”
Lou’s warning comes as China’s National People’s Congress (NPC), the country’s legislature, and the Chinese People’s Political Consultative Conference (CPPCC), the country’s top political advisory body, prepare for the start of their annual gatherings this week.
The meetings, known as the “two sessions”, are the most important annual political gatherings in the world’s second-largest economy, during which Chinese leaders are expected to announce lower targets for the central government’s budget deficit and for the issuance of local government special purpose bonds this year.
Lou, who is director of the CPPCC’s foreign affairs committee, said there were further uncertainties and challenges to China’s fiscal health on the domestic side.
China conducted an expansionary fiscal policy for 11 consecutive years from 2009, resulting in a continuous rise in the fiscal deficit and an explosion in the size of the nation’s debt, he said.
China’s fiscal spending increased 2.8 per cent in 2020 from a year earlier, while its revenue fell 3.9 per cent, the first annual decline since 1976, according to data released by the Ministry of Finance in January. Lou estimated that 15 per cent of state spending last year was used to pay interest on debt, up from the 13 per cent in 2019.
And the debt sustainability of most provinces and cities would become even more worrisome in the 2021-2025 period as the size of local debt continues to rise, Lou warned.
“According to a rough calculation, about a quarter of the provinces will use more than half of their fiscal revenue to repay capital with interest,” he said.
We are facing major changes unseen in a century
He also argued that China’s ageing population was likely to produce serious challenges to the fiscal sustainability of the world’s most populous nation in the coming years.
“The arrival of the ageing society is speeding up, which will change the size and structure of fiscal spending in China, add to the financial burden of elderly care and put pressure on government finances,” Lou said.
At the end of 2019, more than 176 million Chinese were aged 65 or older, accounting for 12.6 per cent of the population, while the number of people aged 60 and above was about 177.6 million, making up 13.3 per cent of the total population, according to the National Bureau of Statistics.
“We are facing major changes unseen in a century,” Lou said.
“No matter the changes in the domestic economic and social situation, or the global economic downturn, soaring government debt and global trade frictions will all create huge uncertainties and severe challenges for China’s fiscal sustainability.”
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