China: Significantly more expansionary fiscal policy in H1 – Standard Chartered

Analysts at Standard Chartered suggest that China’s 2019 budget envisages a widening of the deficit to 2.8% of GDP from 2.6% in 2018 and thinks that the official number substantially understates the degree of fiscal expansion.

Key Quotes

“Our estimate, which consolidates the general public and government funds budget and adopts widely accepted fiscal accounting, shows a widening of the budget deficit to 6.5% of GDP from the actual deficit of 4.7% in 2018. In other words, the approved budget entails stimulus worth 1.8% of GDP.”

“Budget implementation has been aggressive. The general public budget deficit surged to CNY 1.6tn in H1-2019, double that of H1-2018. Revenue growth slowed significantly to 3.4% y/y largely on tax cuts, while spending growth picked up to 10.7% y/y. In addition, the government funds deficit reached CNY 537bn in H1, exceeding the 2018 full-year deficit. The H1 consolidated deficit was five times the level posted for the same period last year.”

“We see room for the consolidated deficit to expand further by CNY 4.3tn in H2 if the 2019 budget is fully implemented. Our estimate suggests fiscal policy can remain expansionary in the next six months, given that the actual consolidated deficit was CNY 3.9tn in H2-2018.”

“We expect the strong – and front-loaded – fiscal stimulus to kick in and support a moderate recovery in economic activity in H2, assuming no further escalation in US-China trade tensions.”