Some investment banks said that China is now facing a huge budget deficit due to its Covid battle. Consequently, the fiscal policy to help bail out its struggling businesses may be limited.
According to Today Nation News, Nomura Holdings has recently estimated that mainland China’s funding gap could hit up to 6 trillion yuan (nearly 900 billion dollars).
The massive deficit occurs as the Covid outbreak is spreading across China and the government, with zero-Covid strategy, is imposing the prolonged lockdown and control measures in various cities to fight the epidemic.
In a report dated May 26, Nomura economists led by Lu Ting said that China’s economic slowdown has worsened and demand for credit has weakened.
Nomura estimated that China’s total fiscal budget will reach 41.6 trillion yuan (6.2 trillion dollars) this year, up 15.6% from last year. This increase would be much higher than the rate of 2% in 2021 and 11% in 2020.
Nomura said that though the government has planned a very aggressive fiscal plan, its existing spending plans are unlikely to expand significantly because of a massive budget deficit that needs to be filled.
According to the bank, if the Chinese government is determined to implement the existing expenditure plan, it could use various means and channels to raise funds.
Apart from land sales revenue, possible options include raising the fiscal deficit ratio, issuing special bonds or other types of sovereign bonds, increasing loans by policy banks and allowing local government financing vehicles to borrow more.
However, the proceeds will only be used to fill the funding gap, and the China will find it difficult to implement new economic stimulus measures.
It means that the fiscal policy to help bail out companies may be limited.
Nomura said that when the Chinese government released its annual budget plan in early March, it overestimated fiscal revenue and land sales. But the subsequent Covid outbreak pushed up the budget spending.
Nomura economists said China’s concern now is that there may not be enough money to support the planned 16% increase in spending.
According to China’s Ministry of Finance, the country’s fiscal revenue totaled 7.43 trillion yuan (about 1.1 trillion dollars) in the first four months of this year, down 4.8% year-on-year.
Fiscal spending increased 5.9% on-year to 8.1 trillion yuan (1.2 trillion dollars) in the period.
Singapore’s “Lianhe Zaobao” pointed out that the fiscal situation deteriorated during this period because the government increased spending in the Covid epidemic clearing policy.
In addition, the government provided tax rebates to taxpayers to help companies cope with the impact of the epidemic, resulting in a large decrease in income.