NPC Budget – Part.2 Fiscal Stimulus or Not?

(Data below from NPC Budget Draft Report, unit is RMB billion)

Analysing China’s budget is not an easy task. Not only should you be familiar with the underlying logic of numbers, the “smoothing” done by the Ministry of Finance makes it even more difficult to decipher whether there is truly a fiscal stimulus. But on CNSpoon, we will help you find the answer in a clear, concise fashion:

Let’s look at central government revenue first – in the past, core revenue has been growing a relatively rapid speed due to fast economic growth. In 2015, it still outpaced GDP growth at 7.3%, but bear in mind the VAT reform has resulted in more VAT revenue on the state level (very few VAT revenue will be allocated to the local tax bureau). The truth is, core revenue is decelerating, and MOF under Mr. Lou Jiwei projects an astonishingly low central government revenue of 1.9%, or 2.2% on a like-for-like basis in 2016! On top of this, state budget stabilisation fund will contribute another 100 billion, same as 2014 and 2015. But please note that in the past, fiscal spending contains cost items to replenish central budget stabilisation fund,  not the case in the 2016 budget. After this 100 billion withdrawal, the central stabilisation fund only has 15.6 billion RMB left, which raises question to the next budget ahead. Moreover, one of the major surprises in this budget session is that central fiscal revenue also includes 31.5 billion from SOE capital. Now this is a relatively small number (o.5% of source of funding), but considering a shrinking stabilisation fund balance, this is the way to keep the source of funding growing at a reasonable speed.


In terms of spending, central government is constraining its spending at 7%, much lower than 13% actual spending growth in 2015. Central to local transfer spending will grow by 5.1%, also much lower than 7% growth in 2015. In the past two years, central government has also helped replenish the fiscal stabilisation fund (stab. fund input below) by 82 and 70 billion RMB, which will not happen in 2016. It is likely that this old setup could go to an end by 2017 budget. Overall, total spending on the central level grows by 5.5%, lower than 8.5% in 2015.


On a local level, revenue growth will be pale at 4.4% in 2016 compared to 9.4% growth in 2015. Central to local spending will be consider a source of fund here, same as what we mentioned above. On top of this, 40 billion RMB will be withdrawn from local budget fund to the revenue, much lower than the actual number in 2015 of 700 billion.


Expenditure wise, local government used to spend some money on replenishing local budget fund and paying down principal of local government bond. This is not the case in both 2015 and 2016. Local expenditure will grow at a mere 1.8%, albeit raising local deficit threshold by 280 billion RMB.


On a headline basis, the fiscal deficit, after series of “smoothing” by central and local funds, will be 2.18 trillion RMB in 2016, or 3% of GDP so as to speak according to MOF. If we leave out all the “smoothing” elements, we will find the actual 2015 budget deficit number quite high at 3.5% of GDP already. In 2016, the budget is actually estimating less budget deficit! However, don’t rush to a conclusion yet, since there is another important element of fiscal budget that needs to be examined – government funds (not the budget stabilization fund).


Before examining the fund situation, let us look at how the deficit is financed in 2015 and will be financed in 2016 – in 2015, 48% or 1.12 trillion RMB was attributed to central government bond issuance; local bond issuance, on the other hand, accounts for 21.2% or 500 billion. The rest is settled by withdrawing fiscal deposit, which is basically central and local budget funds. In 2016, central government bond issuance will increase by 25% YoY, to 59.6% of total funding; local government bonds will increase issuance by 58%, reaching 33% of total funding; less than 8% will be withdrawn from fiscal deposit (little left on the central level, unknown on a local level).


On a fund level, there is a surplus recorded in 2015 of 163 billion RMB, but the actual figure was worse, smoothed by central transfers and budgetary funds. In fact, in 2015 a 3 billion RMB deficit was recorded, quite unprecedented in recent history. In 2016, the MOF is presenting an overall balance of 1 billion deficit in government funds, but the actual deficit can be as large as 426 billion RMB.


If we add up the 426 billion RMB to the 2.35 trillion RMB budget deficit, compared to the projected nominal GDP at 72.7 trillion RMB (based on the 3% budget deficit rate projected by MOF), the actual budget deficit was 3.8% of GDP.  Is it a fiscal stimulus? We tend to argue that it is, given the rather lukewarm growth in revenue and the fiscal discipline in place. MOF is also giving up the balance in state stabilization fund to ensure growth is place in 2016. Thus, the theory that there is no fiscal stimulus does not really stand. The key question though is, whether the 3.8% budget deficit will help the economy? That’s the question that really needs to be examined in 2016.

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