China cuts budget deficit ratio for first time since 2012

BEIJING (Reuters) - China set a 2018 budget deficit target that’s lower than last year’s ratio even as it said “proactive” fiscal policy remains unchanged.

The Ministry of Finance said on Monday that it is targeting a budget deficit of 2.6 percent of gross domestic product (GDP) for this year, compared with 2017’s 3.0 percent target, which was met.

Beijing has vowed to control financial risks and has tightened controls on new local government debt following a borrowing binge after the global financial crisis. Still, government investment is likely to remain a key driver of the economy.

“The new target deficit ratio is lower than what most expected... as it has not been cut since 2012,” Everbright Sun Hung Kai, a Beijing-based investment bank, said in a note.

The 2018 goal bolsters the view “there will not be a further stimulus this year,” it said.

“However, we expect infrastructure construction growth to moderate, not collapse. The government is able to handle a cut in the deficit ratio without sacrificing state-led investment.”

Despite the lower deficit target, the absolute amount of the deficit is expected to be unchanged at 2.38 trillion yuan ($375.92 billion), according to the finance ministry’s annual budget report.

The Ministry of Finance said the budget deficit ratio “is commensurate with China’s steady economic growth and sound fiscal operations, and will expand the space for long-term development and macro regulation”.

Growth in government revenue is forecast to slow this year to 6.1 percent from 7.4 percent, with spending projected to rise 7.6 percent compared with last year’s 7.7 percent.

China supplements its general budgets with various types of funds, allowing it to hit its budget deficit ratio targets despite differing headline numbers.

Last year’s transfers to government revenue topped trillion yuan and included “carryover funds”, “surplus funds”, and other sources.

China’s deficit last year after including transfers from other sources came in spot-on target at 2.38 trillion yuan, the finance ministry said. Excluding the transfers, official data indicate last year’s deficit was 3.08 trillion yuan.

The finance ministry said it will “step up efforts to restructure the debt of ‘zombie enterprises’, and quicken the pace of debt-to-equity swaps carried out in a way consistent with market principles”.

China plans to “actively” resolve debt risk at the local government level and to increase the liquidity of local government bonds, the ministry report said.

($1 = 6.3312 Chinese yuan)

Reporting by Elias Glenn and Stella Qiu; Writing by Tony Munroe; Editing by Richard Borsuk