China approves fiscal stimulus policies for 2022

China’s official GDP growth target this year is “around 5.5 %.” As part of efforts to hit that target, the plenary session of the National People’s Congress at the start of this month approved increases in fiscal stimulus for 2022. Budget expenditures are now slated to rise by 8 % from last year, while budget revenues should grow by less than 4 %. A major impediment to higher revenue growth is ever-lighter corporate taxation even as tax cuts and payment relief granted during the 2020 Covid Recession have been partly extended into this year. On the spending side, some growth is explained by the fact that more spending than usual approved already last year was carried over to this year. Very little information on increased spending has been made available at this point, but support for small and medium-sized enterprises is expected to increase and defence spending should rise at roughly the average pace of other spending.

Off-budget stimulus measures are also planned. Since the start of the year, local governments have been urged to increase their infrastructure investments, which typically rely on off-budget funding. While this year’s quota for special purpose bonds has not been raised from last year, the People’s Bank of China made the unprecedented move of making 1 trillion yuan in its profit reserves available for public use, along with another 650 billion yuan in profit reserves accumulated from earlier years by other state financial institutions and state monopolies. Nearly half of this 1.65 trillion yuan pot of money will apparently go to financing off-budget capital investment projects. Thanks to these budgetary and off-budget public measures, the analytics firm Gavekal Dragonomics estimates the measures in total should increase fiscal stimulus by around 3 % GDP from 2021.

China’s fiscal policies have long skewed to the stimulus side to spur the GDP growth towards the high economic growth targets set by China’s leadership. The IMF estimates that China’s broadly defined public sector deficit corresponded to 16 % of GDP last year and, due to a long string of major deficits, government debt now amounts to roughly 100 % of GDP (BOFIT Weekly 6/2022). At the same time, some local governments are struggling with indebtedness. With the ongoing decline in the construction sector that began last year, local government income from the sale of land-use rights continues to dry up. In its budget summary, China’s finance ministry noted that the pronounced deficits posted by some cities and other local governments were putting increased pressure on basic public service spending, public sector wages and the ability of local governments to cover their day-to-day expenses.