China falls into budget deficit as spending balloons

China’s attempts to spend its way out of economic depression led to a fiscal deficit of 111bn yuan (£12bn) last year.

China falls into budget deficit as spending balloons

Despite a near 20pc rise in tax revenues and a record surplus of 1.19 trillion yuan (£128bn) in the first six months of the year, the dramatic scale of government spending in November and December was enough to plunge the entire year into deficit.

The figures are the first indication of how quickly and forcefully China reacted to the economic crisis after it announced a fiscal stimulus package of 4 trillion yuan in November to build new roads, railways, schools and hospitals.

Government spending in December surged to 1.66 trillion yuan, more than triple the previous month’s total and 31pc higher compared to the same month last year.

The news came as Wen Jiabao, the Chinese prime minister, said that he was mulling over another fiscal stimulus package. “We may take further new, timely and decisive measures. All these measures have to be taken pre-emptively, before an economic retreat,” he told the Financial Times.

Although Mr Wen did not mention any concrete details, it is widely believed that the Chinese government wants to put together a social benefits package, in order to encourage people to up their spending and reduce their saving.

There are already some signs that consumers are reacting positively to government propaganda urging them to open their wallets and “buy Chinese” in order to keep the economy going. Retail sales rose by almost 14pc during the Chinese New Year holidays, compared to last year.

The State Council, China’s equivalent of a ministerial cabinet, has also promised to help farmers weather the downturn by increasing subsidies and raising the minimum purchase price for grain. It also said it would boost agricultural loans, and start to stockpile grain, cotton, cooking oils and pork.

Stephen Green, an economist at Standard Chartered bank in Shanghai, said the Chinese government has enough money to keep spending. “The central government has been running a fairly conservative fiscal policy in recent years, and there is money in the bank. Central government debt was 18pc of GDP at the end of 2008, a low level,” he said.

He has predicted that this year’s fiscal deficit will reach 2.7pc of GDP as China continues to spend its way out of trouble.

Beijing has also already commanded commercial banks to increase their lending and to loosen credit controls. Reports suggest that commercial banks have been ordered to make sure that 1 trillion yuan of credit is available for projects before the end of February. The banks are also likely to be forced to pay for a variety of local government projects, despite the risk of default.

A fall-off in tax revenues during the third quarter also contributed to the budget shortfall, and there are anecdotal reports that Chinese tax offices have been commanded to increase their haul and step up their anti-evasion measures.

More evidence emerged of China’s slowdown as manufacturing figures showed a contraction for the sixth month in a row in January. The CLSA China Purchasing Managers Index rose to a seasonally adjusted 42.2 from 41.2 in December. A reading below 50 reflects a contraction.

By Malcolm Moore in Shanghai
Last Updated: 3:03PM GMT 02 Feb 2009

Source: The Telegraph

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