Double digit deficit alarms China's debt hawks

Ministry of Finance publicly voices concern over China's mounting debt burden

China’s biggest fiscal stimulus plan since the Global Financial Crisis has triggered consternation amongst deficit hawks at its Ministry of Finance.

China’s Two Sessions legislative Congress in March has served as the opportune event for Beijing to unveil a mammoth macroeconomic stimulus plan for 2025.

The plan has the ostensible goals of enabling the economy to weather external uncertainties - chief amongst them a second Trump presidency, as well as providing further fuel for domestic consumption, as China continues reel from a multi-year property slump.

In order to fund 2025’s outsized stimulus, Beijing’s policymakers have lifted the official deficit ratio to 4%, for a single percentage point rise compared to 2024.

4% is the highest level on record, and a major breach with the long-standing convention this century that China keep its deficit ratio at the Maastricht Treaty benchmark of 3%.

Lian Ping, an academic at East China Normal University, points out that this official deficit ratio falls far short of the overall government deficit, as it does not include major forms of debt raising.

Chief amongst them are special treasuries issued by Beijing, and special purpose local government bonds issued by regional authorities.

These are excluded from China’s narrow deficit on the grounds that they are for investment in projects that generate cash flows or have assets as collateral.

Lian expects the “broad deficit” - which includes special treasuries and special-purpose local government bonds, to approach 10% in 2025.

“The super-large scale of government spending and debt arrangements has exceeded market expectations,” Lian wrote.

“It shows the massive determination to accelerate the recovery of demand this year and achieve 5% economic growth.”

Ministry of Finance expresses concern over excessive debt

China’s dovish advocates of deficit spending appear to have held sway over top policymakers with the release of the latest fiscal stimulus plan for 2025.

Deficit hawks from high perches have also voiced their complaints, however, including senior officials at China’s Ministry of Finance (MOF).

MOF’s official media organ has published an opinion piece warning of the dire implications of China’s government amassing too much debt.

“The increase in interest payments on debt will add further to the fiscal burden, leading to ossification of the payments structure,” argued the opinion piece entitled “A Basic Understanding of China’s Current Fiscal Deficit Problems” (对我国当前财政赤字问题的基本认识)

“This is not of benefit to the healthy and sustainable development of fiscal policy.”

MOF also argues that even if interest rates rise, huge government debt could create inflationary peril by expanding base money via treasury issuance and purchases.

“The continually rising volume of demand for Chinese treasuries is driving interest rates higher, spurring commercial banks to continually purchase treasuries.

“This leads to an increase in the central bank’s base money supply, exacerbating the risk of inflation.”

The ministry expressed broader philosophical concerns about dependence on deficit spending to sustain China’s economic growth.

“Deficits are intrinsically the advance spending of tax receipts,” MOF said.

“Following the rise in the degree of deficit dependence of fiscal policy, the cost of fiscal funds will rise.”

As result of these concerns, MOF called for keeping both deficit rates and government leverage in check over the long term.

“Looking at the long-term perspective, our goal is still to pursue cyclical fiscal balance.”

In order to temper the potential adverse impacts of mass fiscal stimulus, MOF has called for “more efficient usage” of deficits, particularly given that “deficits are intrinsically the advance spending of tax receipts.”

“We must focus more on the usage and purpose of deficit [spending.]

“These funds cannot just satisfy the public service needs for the current generation, but must also set the foundations for future economic and social development.”

For this reason, MOF wants China to “further optimise the expenditure structure, supplement shortcomings in infrastructure and living standards, and expand the intensity of fiscal support for aged care facilities and encouraging childbirth.”