In a surprising move on Wednesday, China unveiled plans to boost its fiscal deficit to about 4% of its GDP, signaling a significant shift in economic policy. This change, which marks a departure from last year’s 3% deficit, was detailed in an official report presented to the parliament for review.
This adjustment comes on the heels of increasing tensions and an ongoing trade conflict with the administration of U.S. President Donald Trump. Many had anticipated this hike to 4% of GDP, which now stands as the highest recorded fiscal deficit since 2010, surpassing the previous peak of 3.6% in 2020, according to data from Wind Information.
Just last October, Chinese Finance Minister Lan Fo’an mentioned that there was ample room for expanding the deficit. Furthermore, in November, China rolled out a substantial support package valued at 10 trillion yuan, or approximately $1.4 trillion, over five years to primarily address the mounting local government debt issues.
The real estate sector’s downturn has severely affected local government revenues, with many already facing financial difficulties before additional strains from Covid-19 expenditures. Additionally, tepid consumer spending and sluggish economic growth have amplified demands for increased fiscal stimulus.
Predictions from Larry Hu, Macquarie’s Chief China Economist, suggest that China is set to significantly increase the cap for special sovereign bond sales to 3 trillion yuan ($410 billion) this year, up from 1 trillion yuan in 2024. Furthermore, the forecasted limit for special local government bond issuance is expected to grow to 4.5 trillion yuan from the previous 3.9 trillion yuan.
