March 7, 2017 10:45 pm JST

China claims transparency on defense spending in its budget

Fiscal deficit target stays at 3% amid tighter monetary policy

JOYCE HO, Nikkei staff writer

China dropped no more hints on how much it was planning to spend on defense and foreign affairs than saying its military budget will grow "roughly 7%" this year. (Photo by Akira Kodaka)

BEIJING -- Apart from saying its military budget will grow "roughly 7%" this year, China dropped no more hints on how much it was planning to spend on defense and foreign affairs amid rising tensions on both sides of the Pacific.

In the budget, the item "national defense" is substantiated by a guiding principle devoid of specific figures, while "foreign affairs" as an accounting item is not mentioned in the report.

The Ministry of Finance said in the English version of the document that the department will ensure adequate funds to support China's aim of "building a solid national defense and strong armed forces that are commensurate with China's international standing and are suited to our national security and development interests."

The two figures are usually disclosed in the country's most important political event known as the "Two Sessions" every March, where its rubber-stamp legislature National's People Congress and advisory Chinese People's Political Consultative Conference converge.

Despite that, state mouthpiece Xinhua said on Monday that China's total military budget for 2017 is 1.044 trillion yuan ($151.4 billion), citing an official at the Ministry of Finance. This compares with last year's 954.35 billion yuan.

Premier Li Keqiang's state-of-the-nation address and budget announcement on Sunday was the first time in decades that specific spending figures were not mentioned.

"Following various recommendations, we have explored some new practices in reporting the budget," Xiao Jie, China's minister of finance, told reporters on Tuesday at a National People's Congress briefing. "I can tell you clearly that there is no transparency issue at all."

The so-called new practice referred to the appendix to the budget, which elaborates on a handful of hot-button issues such as corporate tax reform and mounting local government debt. This additional information was only available in the Chinese version of the budget document.

He added that the big picture of revenue and expenditure had already been disclosed in the report, and items such as military, foreign affairs, and public security were separately reflected in the draft, so as to avoid repetition.

Xiao, previously a senior official at the State Council led by Premier Li, took over the role of financial chief from outspoken market reformist Lou Jiwei in November. Lou, former chairman of sovereign wealth fund China Investment Corp., is widely known as a protege of reform-minded former Premier Zhu Rongji.

His somewhat abrupt departure was in part seen as a retirement, given that he had reached the age of 65. But it also predates the reshuffle of many senior officials ahead of the Communist Party's 19th National Congress, the highest organ of state power, this fall.

Guo Shuqing, for instance, left his role as governor of Shandong province to head the China Banking Regulatory Commission last week. Guo used to run China Construction Bank, the country's second largest state-owned lender by assets, and the financial market watchdog China Securities Regulatory Commission.

Financial focus

The appointment of Guo, widely known as a market reformer, is seen as part of the government's drive to overhaul the country's financial system, as bad debt is building up in the corporate sector in a slowing economy.

Li said on Sunday that China's gross domestic product growth is targeted to expand "around 6.5%, or higher if possible" this year.

While capping money supply growth at 12% to rein in credit risks, he set the fiscal deficit target at 3% of GDP, or 2.38 trillion yuan ($345 billion), the same level as last year. He also plans to reform the tax system by replacing business tax with value-added tax across all sectors.

J.P. Morgan noted that although the headline budget deficit target stays unchanged from 2016, an extra 800 billion yuan of local government special bond issuance has been announced for this year, compared with 400 billion yuan last year.

"For 2017, we expect augmented fiscal deficit may rise further to 11.4% of GDP, supporting an expansionary fiscal policy stance," the U.S. bank said in a report on Monday, highlighting that "actual fiscal policy implementation will still largely rely on off-budgetary fiscal spending in 2017." It estimated that the actual deficit as a proportion to GDP stood at 3.8%.

Hu Yifan, chief China economist at UBS Wealth Management, said Beijing would be under pressure to achieve the goal this year citing financial difficulties facing local governments. "They now spend about 50% of their new loans to pay off debt," she said in a media call on Tuesday. "Meeting that target will require a much greater effort than before."

UBS estimates that economic growth in China will slow to 6.4% this year despite a raft of fiscal stimulus. It expects the People's Bank of China to cut the reserve ratio requirement by one to four times this year although a benchmark rate increase is unlikely. The Chinese central bank is also expected to increase inter-bank lending rates to deleverage the economy.

A major drag on growth is the property sector, according to Hu. Cooling measures such as home purchase restrictions rolled out in primary cities since October have reduced new construction and home transactions. "These measures are not likely to be lifted soon," she said, pointing to stability as priority for Beijing ahead of a leadership reshuffle at the 19th Communist Party Congress.

Nikkei staff writer Jennifer Lo in Hong Kong contributed to the article.

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