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A Chinese Central Banker’s Obsession With Fiscal Policies, Aversion to Low Rates
Aug 23, 2016 5:33 pm HKT
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Central bankers in some major economies have been talking up the need for governments to spend more, rather than rely on interest rates, to get sluggish economies going. For one Chinese central bank official, it’s become a fixation.
Sheng Songcheng, director of the survey and statistics department at the People’s Bank of China, called anew for the government to expand its fiscal spending in an interview with the Chinese Business News published over the weekend. Mr. Sheng said the government’s fiscal deficit rate–the difference between revenue and spending as a percentage of the country’s total economy–could be increased to 5% from this year’s around 3%.
That’s preferable, he said, to lowering interest rates. Cheap money is proving to be a less effective tool world-wide, he said, and Chinese companies are prone to take advantage of cut-rate capital to invest in the property market or other investments with quick returns.
“Nowadays the whole world is in a race for lower interest rates,” Mr. Sheng was quoted as saying by the financial news daily. “Even if you implement negative interest rates, you won’t necessarily boost investment.”
It’s a theme Mr. Sheng has been sounding for several months. Some economists are reading the remarks as a signal to the markets that the central bank isn’t looking to lower interest rates or take other aggressive measures to ease the cost of capital.
“They are not just policy suggestions. He is trying to communicate about future policy directions,” said He Jun, an economist at Beijing Anbound Information Co., a private think tank. Mr. He expects more government borrowing and spending, rather than lower interest rates are in store.
The central bank cut benchmark interest rates five times last year, the last time in October.
Still, China’s lending costs remain elevated–on average as high as 5.26% from banks and 18% to 20% for private firms on the grey market–too high to help firms weather the current economic downturn, said economists of Citigroup Global Markets Inc.
Mr. Sheng’s concerns, as well as the government’s, about investment have been justified. Private investment, which accounts for more than 60% of the country’s total investment, has been slowing since the beginning of this year and dropped to a record new low in July, official data showed. The government this week called for lowering business costs for private enterprises.
China has ample room to increase its fiscal deficit. In an essay published in the official Economic Daily in February, Mr. Sheng said even if the government expands fiscal deficit to 5%, total government debt will stand at around 78% of the economy at the end of 2025–a level much lower than that of many advanced economies.
Economists put China’s actual fiscal deficit, including off-budget borrowings most of which are funds raised by local government-backed entities, somewhere between 8% and 10% of the country’s gross domestic product.
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