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Economist: Deficit no cause for alarm

By Xin Zhiming and Wang Xu (China Daily)
Updated: 2009-03-06 08:13

China's record fiscal deficit budget of 950 billion yuan (US$139 billion) for 2009, announced by Premier Wen Jiabao yesterday, is "safe" and allows the government room to react to changes in the economy, a senior economist said.

The deficit, the highest in six decades, was announced at the opening of the 2nd session of the 11th National People's Congress as the country looks to boost spending to soften the blow of the global financial crisis.

Jia Kang, director of the research institute for fiscal science under the Ministry of Finance, said: "It is safe and there is still room for China to further increase government spending."

But that would depend on the economic indicators of the second quarter, he told China Daily during the ongoing session of the 11th National Committee of the Chinese People's Political Consultative Conference.

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The deficit is almost three times the previous record set in 2003 and a massive rise on the 180 billion yuan for 2008.

But despite the surge, which includes a 750 billion yuan deficit and 200 billion yuan in local government bonds, it falls below the generally accepted "warning line" of 3 percent of the country's gross domestic product (GDP). Also, China's reduction of the deficit in previous years has made it possible to issue more bonds this year, Wen said as he delivered the government work report.

"The ratio of the cumulative balance of outstanding government bonds to GDP, which is around 20 percent, is within the acceptable range of what our overall national strength can bear and is safe," Wen said.

China's outstanding government bonds reached 5.3 trillion yuan last year, according to ministry figures, while it said the country would keep the standing government bonds within 6.27 trillion yuan this year. It means the net issue of bonds would be around 1 trillion yuan for 2009.

If China's GDP expands by 8 percent during 2008, it would make it 32.5 trillion yuan, with the ratio of budgeted outstanding bonds to GDP 19.3 percent.

"There is no consensus on the warning line in terms of the ratio," Zhuang Jian, senior economist with the Asian Development Bank in Beijing, told China Daily. "But generally if it is below 30 percent, people would think it is safe."

He explained the ratio was much higher than 30 percent in many countries, such as Japan and the United States, meaning China still has room to issue more bonds in the coming years if global or domestic economies remain sluggish.

Bi Jiyao, senior researcher for the National Reform and Development Commission, said the country could keep its deficit high in the coming years to stimulate the economy and invest in revamping the social security network.

The government saw its revenues lose their strong momentum at the second half of last year and, with the slump in the export industry, must greatly increase its spending to sustain domestic investment growth.

Sun Mingchun, an economist for Nomura International, said in a report that China can achieve 8 percent economic growth this year, while World Bank expert Louis Kuijs disagreed. "Given the very unfavorable international outlook for 2009, it will be very difficult to achieve," he said.