NRI Latest News: China could raise a lot of fiscal support for the economy by issuing as much as 10 trillion yuan in special debt, said a prominent Chinese economist, reflecting mounting expectations that Beijing will crank up public spending as part of its economic stimulus efforts.
Authorities could build confidence by massively raising government spending on public projects, Jia Kang, former head of an institute affiliated with the country’s ministry of finance, told Chinese newspaper The Paper on Tuesday.
“As these projects start up, they will create jobs, raise citizen’s income, and unlock consumption potential,” said Jia, who currently heads the China Academy of New Supply-Side Economics, a private think tank. He refused to say at what point he could envision such scaling up of the bond issuance, saying “now to 4 trillion or even 10 trillion yuan would not be excessive.”
Policymakers face a daunting economic scenario, with China’s reliance on infrastructure spending to keep growth aloft nudging up risks to debt. In addition to that, domestic investment being extremely high at such a time due to weak demand has also promoted deflationary forces, which have already dragged down prices and compelled companies to cut wages or lay off workers to reduce costs.
These developments marked the beginning of the first easing cycle in the United States, with last month’s interest cut by the Federal Reserve that will open the door for the People’s Bank of China to cut interest rates and lower banks’ reserve requirement ratio. Analysts noted that the PBOC may cut interest rates on outstanding mortgages in a move to assist home owners.
This would result in higher expense for China. The central government has been accelerating bond emissions to finance central government debt to fund strategic industries and key projects, while subnational governments have also been growing debt emissions to finance the construction of giant projects.
While the policymakers may depend on some fiscal stimulus and monetary ease to rev up growth, a key meeting of the ruling Communist Party last month gave a clearer priority to the supply side. This indicates forceful measures to tackle weak consumer demand and risks of deepening deflation are unlikely in the near term.
The broadest measure of prices of goods and services in China, GDP deflator, has been falling for five consecutive quarters, the longest stretch of deflation since 1999.
The measure is likely to remain in negative territory for a sixth quarter in July-September with the deflation in producers’ goods deepening and consumer prices remaining dull.
Sharp consumption rebound again is doubtful amid jobs and income insecurity.