China signals room left to borrow in drive for economic rebound

China’s chief economic planner says Beijing has room to leverage up to rescue the coronavirus-stricken economy, pointing to official figures that show the country’s debt load remains low by international standards.

Cong Liang, secretary-general of the National Development and Reform Commission (NDRC), said at a press conference on Saturday that it was “viable, safe and necessary” for the Chinese government to increase borrowing to address the economic downturn.

The remarks follow the announcement on Friday by Li Keqiang, China’s premier, that Beijing would issue bonds and raise the fiscal deficit by a combined Rmb5.8tn ($813bn) to revive the ailing economy.

While the stimulus package stops well short of measures taken by the US and Europe, where central banks have embarked on aggressive interest rate cuts and purchases of government bonds, it has raised concerns over China’s mounting debt burden.

“Beijing is exchanging short-term gains for long-term pain,” said Bo Zhuang, an economist at TS Lombard.

It remains an open question how much more leverage Beijing needs to take on as economic activity continues to pick up. China’s power consumption, a proxy for business activity, rose more than 5 per cent from a year ago during the first 20 days of May, according to the NDRC, after remaining virtually flat in April and falling 4.6 per cent in March.

But Chinese officials see significant potential in their policy toolbox, and Mr Cong said China’s planned fiscal deficit ratio of at least 3.6 per cent this year remained “very low” compared with the international average of just under 10 per cent.

Mr Cong added that China’s debt pressure was “far below the levels in major advanced and emerging economies”. Official data shows China’s government debt-to-GDP ratio stood below 40 per cent in 2019, compared with more than 106 per cent in the US and almost 70 per cent in India.

Ning Jizhe, a deputy director at the NDRC, said government bond proceeds would go to physical projects that benefited the economy. “We need to promote a reasonable level of debt-fuelled investment to create a lot of quality assets,” he said.

Analysts warned that would be no easy task, as most government-backed projects, which range from community parks to roads and water treatment plants, will struggle to generate enough revenue to repay the debt.

“If a project has good cash flow,” asked Li Qilin, an analyst at Yuehai Securities, “why shouldn’t it be financed by the market rather than government bonds?”

China’s official debt reading also fails to account for borrowing by local government financing vehicles, which fund most infrastructure nationwide and enjoy an implicit official guarantee. The IMF estimates that China’s public debt-to-GDP ratio for last year would exceed 80 per cent with the inclusion of LGFV debt.

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