Minister of Finance Lou Jiwei answers reporters' questions during a news conference in Beijing on Monday. FENG YONGBIN / CHINA DAILY
China can afford to expand its fiscal deficit this year while reining in risks associated with the overall debt level, Finance Minister Lou Jiwei said on Monday. [Special Coverage]
Lou made the remark in response to Premier Li Keqiang's Government Work Report, delivered on Saturday, in which the premier said China will continue to fund massive State-led infrastructure projects while lowering tax levels for more industries.
The government will instead raise the level of deficit to allow for the capital outlays needed for the new projects, Lou said.
Lou emphasized that the mounting debt of local governments is under control. Some overseas observers have said it could affect China's overall economic health.
"About 5 trillion yuan ($769 billion) in local debt is coming due by the end of this year, but we will arrange some debt-to-bond swaps for local governments, so their debt will not cause a major concern," Lou said during a news conference.
Last year, China allowed local governments to reduce their repayment pressure by issuing 3.2 trillion yuan worth of low-cost bonds to pay off some of their high-cost debt.
By the end of 2015, local governments' direct debt had reached 16 trillion yuan, 600 billion yuan of which was incurred last year.
Indirect and contingent liability stood at 8.6 trillion yuan at the end of 2014.
"The contingent liability may increase amid an economic slowdown, and we need to strengthen supervision to prevent local governments from issuing debt off the balance sheet," said Lou.
So far, the ratio of Chinese government debt to GDP is about 40 percent, lower than in many countries.
Guan Fei, a senior analyst at China Chengxin International Credit Rating, said: "Most of the local government debt is under control, as it is backed up with assets. But we need to keep a close eye on regional risks, especially in provinces experiencing a sharp economic slowdown."
According to Lou, the continuous fall of the producer price index, a gauge of factory gate prices, has limited the room for fiscal income growth, so the government needs to modestly expand the deficit.
"But it is hard to say how much leeway there is for this, as it depends on the resilience of the economy," Lou said.
China plans to raise the deficit-to-GDP ratio to 3 percent this year, from 2.3 percent in 2015, giving the government more to spend.
"The expanded deficit ratio is within the margin of safety, and it will help realize the economic growth target," said Jia Kang, a member of the Chinese People's Political Consultative Conference National Committee and a former director of the Ministry of Finance's Research Institute for Fiscal Science.
Many international institutions hold that a country's deficit should not exceed 3 percent of its GDP. But this 3 percent "warning line" should not be taken as a uniform standard, and it is mainly applicable to members of the European Union, Vice-Minister of Finance Zhu Guangyao said on Friday.
The warning line should vary from country to country based on the conditions in each, he said.
Zhu said he expects China's fiscal revenues to decrease slightly due to tax and fee reductions, and the country will deal with possible fiscal imbalances by temporarily allowing the deficit to increase moderately.
