China: Fiscal Policy

Background:

After the Asian financial crisis, China began paying down its sovereign debt, and by the end of 2008 China’s official debt to GDP ratio had fallen to 17.7%. The fiscal stimulus put in place during the global financial crisis in 2008, and the contraction in revenues due to a slowing of the economy, modestly boosted the government’s debt level in 2009 to about 20% of GDP. In 2008, the government ran a slight deficit, which expanded to 2.2% of GDP in 2009, excluding local government debts guarenteed by the Ministry of Finance. Chinese officials are hesitant to run large deficits, and a 3% of GDP target encouraged the government to boost revenues even as it implemented the massive stimulus.

The government typically books about a quarter of its expenditures in December, which can complicate forecasting the budget deficit, but help officials hit their target. The largest fiscal vulnerabilities are at the local government level. Local governments, however, struggled to finance the stimulus and relied more heavily on quasi-official finance companies and land sales for revenue in 2009. Adding their debts, could raise China's aggregated public debt ratio to close to 60% of GDP.