Abstract: China’s general public budget expenditure could be secured this year, but whether fiscal expenditure, which includes governmental fund budget, can achieve higher year-on-year growth remains to be seen. The central government must pay special attention to it.
China's economic growth target of 5.5% is the anchor of the 2022 macroeconomic policy. There must be significant policy support to achieve the goal.
The 2022 Government Work Report, or the Report, allows for a more than 2 trillion yuan ($316.5 billion) increase in spending over the 24.6 trillion yuan in 2021. Total expenditures are expected to grow by 8%, which is close to or even higher than nominal GDP growth in 2022 and will help to stabilize the economy.
The question is, how should fiscal income in 2022 meet the need of the 26.6 trillion yuan spending? Given the fiscal income of 20.2 trillion yuan in 2021, there will be a 6.4 trillion yuan gap to be filled.
Based on current policy logic, we could have three options.
First, expand the fiscal deficit. Given the 2.8% budgetary deficit for 2022, a 5.5% actual growth target, and a GDP deflator of 2%, nominal GDP could be calculated to be around 122 trillion yuan, with a deficit of 3.4-3.5 trillion yuan.
Second, boost fiscal income. Fiscal income in 2021 was 20.2 trillion yuan, and if it should grow 5% in 2022, there should be an increment of 1 trillion yuan.
However, there is a problem: fiscal income is linked to economic performance, particularly in the upstream industries. It is unknown whether there will be additional tax cuts this year, but if the 5% fiscal income growth target is to be met, the YoY growth rate of PPI should remain high.
Third, profits from SOEs and budget stabilization funds. The Report mentions a very important item: "specific state-owned financial institutions and franchised institutions will pay in profits carried over from recent years per the law" - a way of supplementing fiscal revenue that was not available even in 2020. For a long time, SOEs profits have not been paid in full as required. The total after-tax net profit of Chinese SOEs in 2021 was 2.47 trillion, with central SOEs accounting for 1.57 trillion. It’s safe to say that the SOEs' profits have the potential to fund larger fiscal expenditures.
In addition to the general public budget expenditure, budget expenditure for government managed funds is part and parcel of the fiscal effort. Based on previous years' experience, a significant portion of the budget expenditure for government managed funds went into the general public budget, which was not directly reflected in the governmental fund expenditure item.
The expenditure from the governmental fund budget is largely determined by revenue. Land premiums, which are derived from land purchases by real estate enterprises, are the primary source of revenue for the governmental fund budget.
In other words, whether or not the governmental fund budget will have an impact is determined by whether or not real estate companies can maintain the same aggressive land purchase enthusiasm this year that they have in the previous five years.
Decision-makers are remaking real estate policies, improving market expectations, but opinions are divided on how much and how quickly sales, investment, and new projects can recover.
From policy implementation to demand recovery, cash flow recovery in real estate companies, and balance sheet recovery, this is a multi-step process. Given the current level of debt in the real estate sector, this process may take longer than expected.
Before real estate companies' balance sheets are substantially repaired, they are likely to be cautious about land purchases. This will directly impact the growth rate of revenue and expenditure of the budget for government managed funds.
Overall, general public budget expenditure could be secured this year, but whether fiscal expenditure, which includes governmental fund budget, can achieve higher year-on-year growth remains to be seen. The central government must pay special attention to it.
In comparison to last year, the Report contains less about monetary policy and more about fiscal policy this year, but monetary policy becomes more macro.
According to the Report, monetary policy should not only increase the quantity ("maintain the growth rate of money supply and social financing to match the nominal economic growth rate") but also decrease price ("promote financial institutions to lower the real lending rate", "reduce the comprehensive financing cost in real terms"). However, with the current benchmark interest rate level, achieving this goal is difficult. Especially when the task of risk prevention remains important, we must leave enough buffers to the banks instead of compressing the banking sector's spread to lower financing costs. Otherwise, with profitability or safety considerations in mind, the banking sector is likely to allocate loans to sectors that do not require them, resulting in a loss of resource allocation efficiency and a deviation from the original purpose of monetary policy, which was to adjust the structure.
The monetary authorities should therefore lower real lending rates by lowering the short end of the interest rate and driving the whole interest rate curve downward. This would give banks more room and discretion to at least secure the existing cushion and take on more risk as appropriate. This is the best way to accomplish this year's monetary policy mandate, as well as the best policy approach that will most effectively mobilize the market and ensure efficient resource allocation.
This article was first published on CF40's WeChat blog on March 5, 2022. It is translated by CF40 and has not been reviewed by the author himself. The views expressed herein are the author's own and do not represent those of CF40 or other organizations.
