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China to rein in COVID spending in sign of economic confidence

Beijing shifts focus to taming of 'gray rhino' financial system risk

Workers at a construction site in Beijing: Chinese President Xi Jinping is turning his focus to the post-pandemic economy.   © Reuters

BEIJING -- With China's economy showing signs of recovering from a coronavirus-induced slump, its leadership will begin to push back a bulge in government spending, starting at a key economic planning meeting expected this month.

Real gross domestic product is expected to grow around 2% in 2020, with a January-March contraction dragging down the full-year figure. Many see growth snapping back as high as 7% to 8% in 2021.

But there is concern that too big a jump could overheat the economy and lead to excessive corporate debt. To keep the economy under control, Xi is expected to start normalizing fiscal policy at the annual Central Economic Work Conference, usually held in December.

The central government is on track to a budget deficit of 3.76 trillion yuan ($575 billion) in 2020, or more than 3.6% of GDP. This would mark the highest percentage since 1960, in the middle of the Great Leap Forward.

China should aim to reduce the deficit to around 3% of GDP in 2021, the state-affiliated Chinese Academy of Social Sciences recommends.

Beijing is also likely to rein in local governments' issuance of bonds to fund infrastructure projects. A total of 3.75 trillion yuan of this debt has been sold in 2020, about 70% more than in 2019. Bond market watchers expect the tally to slip under 3.5 trillion yuan.

While reducing spending, the Chinese government will allocate more of resources to economic priorities. It will likely continue offering tax relief and financial assistance to small and midsize businesses, which are struggling more than large corporations to recover from the pandemic. Fostering new industries that boost China's technological capabilities is another priority area.

Xi also looks to step up oversight of the financial sector to manage risks have built up from such factors as coronavirus-related stimulus.

The real estate market in particular is the biggest "gray rhino" in terms of financial risks, the head of the China Banking and Insurance Regulatory Commission, Guo Shuqing, recently said, using a metaphor for an obvious but neglected threat.

At a meeting Friday, the Chinese Communist Party's Politburo "stressed efforts to promote the stable and healthy development of the real estate market" according to state media.

The People's Bank of China and other financial institutions will fully adopt next year restrictions on fundraising by property companies in an effort to discourage these businesses from relying too heavily on debt. Excessive debt could leave them vulnerable to market fluctuations, in turn putting pressure the financial system as a whole.

Banks are tackling their bad-debt problem, aiming to write off 3.4 trillion yuan in nonperforming loans in 2020, according to Guo. This translates to disposing of 1.6 trillion yuan in bad debt in the October-December quarter alone, roughly 70% of the 2019 total.

The Chinese economy was losing momentum even before the pandemic, weighing on regional banks' finances. Bank regulators had identified 503 banks as financially unstable by the end of 2019 and took corrective action. These account for more than 10% of the banks covered under the deposit insurance program.

Then the pandemic triggered a spike in business failures. The Peterson Institute for International Economics cites an estimate that 2.3 million Chinese businesses, or 6% of the nation's companies, went belly up in the first half of 2020.

The PBOC has run stress tests on 1,550 banks. With the 2020 GDP growth seen at just 1.6%, nonperforming loans would increase to account for 5.5% of total lending at the end of 2021 and 6.7% in 2022 if nothing is done to address the problem, according to the central bank. This compares to a previously stable bad-loan rate below 2%.

Oversight of big banks will also be strengthened. The PBOC and the banking and insurance commission will ask "banks deemed crucial to the financial system" to take adequate steps, such as boosting capital. By preventing "too big to fail" banks from falling into financial trouble, authorities will try to minimize financial system concerns.

While fiscal spending and financial oversight will revert to normal mode, monetary policy will remain a challenge. Some have called for interest rate hikes to rein in the real estate bubble, but the first dip in the consumer price index in 11 years has raised the risk of deflation.

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