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Thereâ??s a bit of an interesting situation developing in Chinese public finance.
According to analysts at Standard Chartered, based on current trends, the governmentâ??s revenues could fall short of expenditures by only CNY300-500bn, rather than the CNY1,050bn expected in the budgeted deficit.
This means the deficit will account for about 0.8-1.3 per cent rather than 2.7 per cent of GDP â?? while nominal GDP growth is currently projected to come in at 15 per cent. The overall current account surplus, therefore, will be that bit bigger too.
As the analysts note:
In jurisdictions which have already met their tax revenue quotas, officials are reportedly telling companies to delay further payments until January 2011. In parts of the country where revenues are still falling short, companies are being asked for pre-payments.
Meanwhile, as far as spending goes, local governments and ministries are already finding it difficult to spend the whole sum of their 2010 budgets.
In fact, according to Standard Chartered, we should expect some rushed spending activity in the next quarter, just to cover as much of the remaining sums as possible:
The usual thing has happened: departments all got notional spending increases over the previous yearâ??s number in the 2010 budget, and have spent the year trying to find things to spend the money on.
In recent weeks, the MoF has instructed them to get a move on. Assuming that spending meets the budget target (which it tends to do, since unspent budget is forfeited), some CNY 3.849trn will have to be spent in the last four months of the year "â?? an extraordinary 10% of full-year GDP.
In 2009, faced with the same problem of unspent cash, government departments reportedly spent CNY 2trn in December alone, 6% of 2009 GDP. (It is unclear how much of this money is actually spent and how much is parked in off-balance-sheet bank accounts and spent at greater leisure later.)
Despite the last-minute spending malarkey, though, China is still left with a pretty flexibility position in terms of further fiscal stimulus, if itâ??s needed. Comparatively, looking around the world, Standard Chartered say there are few big economies with such an enviable official position.
In their opinion, in fact, there is even a case for the Ministry of Finance to run a much bigger deficit if it wants to maintain a current surplus of more than 4 per cent come 2013.
They explain as follows:
This year, the MoF looks ready to run a deficit about 1.5-2ppt lower than budgeted, and a smaller deficit than in 2009. So the current account surplus as a percentage of GDP will be 1.5-2ppt higher than it would have been if the MoF had spent more.
In short, what we need is a bigger government deficit. We need the government to tax less and spend more, to borrow more household savings, and to spend it on services "â?? education, health care and low-cost housing all being suitable examples. However, the MoF"?s good fiscal husbandry ("?big deficits are for spendthrift Western governments!"?) means that at least so far, this option has not really been considered. In short, if China wants to achieve a current account surplus of 4% of GDP by 2013-14 (a topic we will be considering later this week), the MoF will have to run a bigger deficit.
Of course, there is a possible side-effect in terms of cash in the system.
As Standard Chartered note, just because China is looking at a relatively balanced government budget this year, does not mean the country isnâ??t implicitly â??printing moneyâ?? in its own right.
This, of course, is down to the money multiplier effect. In Europe and other western economies the effect is fairly broken, so economies can (arguably) get away with high scale quantitative easing programmes without too much of a M2 follow-through. In China, though, this is not the case â?? due, among other reasons, to the stimulative macro policy effects from an undervalued exchange rate.
The following chart from Standard Chartered reflects the picture:
And with banks, err, also being forced to lend a lot more effectively in China than in other western economies, M2 growth is once again verging beyond the 20 per cent rate, against a historic range of about 15-18 per cent.
Which leaves the Standard Chartered analysts to conclude:
As a result, we need to be constantly alert to the risks of food-price inflation and asset bubbles.
Full note available in the usual place.
Related links: There's some good news out of China too, really "â?? FT Alphaville That China rate rise [updated] - FT Alphaville China rate move turns focus on rising prices "â?? FT
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