China's fiscal spending spree to be bolstered by 'very special' 1 trillion yuan payment from central bank

The sudden announcement that China's central bank will transfer 1 trillion yuan (US$158.3 billion) to help fuel the government's fiscal-expansion goals has given rise to questions about the breadth of Beijing's policy toolkit.

And analysts are wondering what policymakers' next move might entail if economic expansion - more government spending - fails to meet Beijing's expectations.

Experts tend to believe this is just one of many reserve tools that Beijing is considering as it attempts to defend its national economic growth target for 2022 of 5.5 per cent - a figure that could be threatened by a protracted war in Ukraine, as well as by lingering tensions with the United States and European Union.

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"It's a coordinated loosening of both fiscal and monetary policy," China International Capital Corporation (CICC) wrote in a note on Wednesday. "This year's fiscal expansion has rarely been seen in the past decade. It will be a key tool to stabilise growth."

Although authorities have budgeted for a 2.8 per cent fiscal deficit, less than last year's 3.2 per cent, and kept the quota for local special-purpose bonds - which are funnelled into infrastructure spending - unchanged at 3.65 trillion yuan, they have also vowed to increase support for the national economy.

This support includes 1.65 trillion yuan in revenue that will be paid by state-owned financial institutions and state monopolies, as well as greater credit support.

The People's Bank of China (PBOC) and other state-owned institutions and monopolies are required under Chinese law to pay part of their profits to the government, but it had been suspended for two years due to the coronavirus.

The trillion-yuan payment by the central bank alone is a quarter the size of the 4 trillion yuan stimulus package that China used in 2009 to offset the impact of the global financial crisis.

And according to CICC, a Beijing-based investment bank, that payment is equivalent to a 50-basis-point cut of the reserve requirement ratio on commercial banks - which the central bank did twice last year.

However, CICC said the economic boost resulting from the PBOC's 1 trillion yuan payment could be better, as the move, combined with other fiscal inputs, could lift nominal gross domestic product (GDP) growth by 1.8 percentage points this year, helping Beijing reach its 5.5 per cent target.

PBOC profits seldom appear in budget reports from previous years. Its foreign counterparts also hand in profits, but the amounts are small, relative to what the PBOC is paying now. For instance, the US Federal Reserve transferred US$88.5 billion in profits to the US Department of the Treasury last year - an increase of 60 per cent from a year earlier.

China's Ministry of Finance called this a "routine practice", noting that it is one of the country's reserve tools. The central bank said the funds will be used for tax rebates, help support businesses, boost employment, and go to debt-ridden local authorities. It also denied that the payment would be a burden on market entities.

The PBOC's move comes as Chinese academics have been arguing for greater fiscal loosening in the face of global uncertainties.

Chen Yuyu, director of Peking University's Institute of Economic Policy Research, warned a week ago that Beijing's policy support was inadequate last year, and questioned whether its coronavirus stimulus measures should have been withdrawn so early.

China released more than 9 trillion yuan worth of liquidity in the first few months of the pandemic, but it started to pull back in May 2020 - much earlier than the Fed, which hinted at tapering last August.

Beijing's fiscal policy also tightened, with the 2021 fiscal deficit ratio lowered by 0.4 percentage points from a year earlier, and the expenditure budget was actually under-implemented.

Last month, the China Finance 40 Forum, a Beijing-based think tank composed of financial officials, scholars and executives, proposed a larger rate cut and also fiscal subsidies for infrastructure-related bonds and loans.

Ding Shuang, chief Greater China economist at Standard Chartered Bank, said that the central bank's special arrangement is far bigger than expected, and that it provides a new expansionary tool for economic stabilisation.

"It's very special. It provides revenue for fiscal expenditure and increases the money supply, but will not expand its balance sheet," he said. "The PBOC seems reluctant to expand its balance sheet, or at least gives that impression, while the Fed plans the opposite."

That monetary policy divergence - China cut two policy rates by 10 basis points in January while the US looks poised to raise benchmark rates by 25 basis points later this month - could result in more capital flight, particularly after there have already been heavy sell-offs in China's bond and stock markets recently.

Ding estimated that the broad fiscal deficit, including the revenue-spending gap financed by local special-purpose bonds and a cash surplus from previous years, will account for 6.9 per cent of GDP, higher than the actual 5.2 per cent last year.

"The Ukraine war brings many uncertainties, but we still see moderate upside risk to our [GDP] growth forecast of 5.3 per cent," he said.

Beijing has long rejected the use of an all-out stimulus, as it tries to strike a balance between economic growth and risk control.

In the government work report released last week, the world's second-largest economy discussed the establishment of a financial stability fund - a reminder of Beijing's wariness of overblown stimulus measures.

This article originally appeared on the South China Morning Post (SCMP).

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