(June 23): China narrowed its cumulative fiscal deficit for the first time in more than two years, pressing ahead with austerity despite muted domestic demand and slowing economic growth.
The combined shortfall under China’s two biggest government budgets shrank 4.1% in the first five months from the same period a year earlier to 3.16 trillion yuan, according to Bloomberg calculations based on data released by the Ministry of Finance late on Monday.
Last month alone, government expenditure fell 3.9% on year, the third consecutive month of decline. Total spending under the two accounts fell 0.3% in January-May even as broad income climbed 0.8%.
“Fiscal policy has become less supportive of growth in the second quarter versus the first, on the back of falling land sales revenue and shrinking policy bank support,” Goldman Sachs Group Inc economists including Lisheng Wang said in a report. But given strong exports and this year’s modest growth target, “we do not expect significant, broad-based stimulus in the near-term”, they said.
The fiscal choices made by China come at the expense of economic growth, with consumer spending and investment dropping to levels unseen since the pandemic. Exports are benefiting from a global artificial intelligence boom, however, reducing the urgency for stimulus to offset weak domestic demand.
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Goldman’s economists have downgraded their forecast for China’s growth in the second quarter from 4.7% to 4.5%, which is at the bottom end of the government’s target for this year’s annual expansion.
The slide in consumption and investment last month was partly a result of slower fiscal spending as local governments rushed to meet a deadline to clear so-called "hidden debt", according to Huatai Securities Co analysts including Wang Mingshuo.
“With many local governments having fully cleared their implicit debt, we will closely track whether the slowdown in the fiscal spending momentum will ease in the second half,” they wrote in a Tuesday note. “Any softening of this spending drag would unlock pent up demand that was previously deferred on expectations of lower oil prices.”
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Government expenditure could pick up in the coming months as China rolls out plans to spend more than seven trillion yuan this year to invest in infrastructure, including a network of computing hubs.
For now, infrastructure-related expenditure is in decline, decreasing 12% on year in May after an 18% slump in the previous month, according to Bloomberg calculations based on the official numbers.
The property downturn remained a drag on government revenue, with income from land sales tumbling nearly 36% last month, marking its eighth straight month of double-digit decline.
Tax revenue, however, rose 6.8% in the month, taking its increase to 4.4% in January-May. Authorities have been strengthening the collection of taxes as they target overseas capital gains and other foreign income.
A rebound in factory inflation may also have helped improve fiscal revenue by boosting taxes, according to Goldman.
Lynn Song, chief economist for Greater China at ING Bank NV, said a government-led investment rebound is possible in the second half of the year.
Even so, “it’s still quite uncertain if this will be enough to offset the decline in private investment,” he said. “Given the weak domestic indicators the last few months, there could be pressure to speed up the pace to ensure this year’s growth remains within target.”
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