Govt steps on fiscal pump

Farmers harvest wheat in Yuncheng, Shanxi province, on Sunday. The central government increased fiscal expenditures in agricultural development and on projects to improve people's livelihoods in the first five months. [Photo/China Daily]

Projects meantto raise living standards see rapid growth in expenditures

Policymakers in China stepped on the fiscal accelerator in May as they moved to stimulate the economy through more government spending.

According to data from the Ministry of Finance released on Wednesday, fiscal spending jumped 24.6 percent year-on-year in May to 1.3 trillion yuan ($208 billion). The surge in growth was in sharp contrast to the 9.6 percent rise in the first four months.

In the first five months, fiscal revenue climbed 8.8 percent while fiscal expenditures rose 12.9 percent from a year earlier, the ministry said.

Central government spending rose 15.8 percent in May, while local government expenditure soared 26.9 percent, the ministry said on its website.

"The May data may seem shocking, but it really was just a correction from the relatively conservative fiscal policy (that's been in place) since late last year," said Xu Gao, chief economist for Everbright Securities Co.

Government spending has been increasing as the economy softens. GDP expanded 7.4 percent in the first quarter, its slowest pace in 18 months.

The central government has repeatedly promised to pursue a proactive fiscal stance, but local officials have been cautious about spending amid expectations for reform measures in the first half.

The Ministry of Finance recently urged State agencies and local governments to quicken budget spending, warning that they risked losing 2014 budget funds not allocated by the end of June. China's fiscal year ends on Dec 31.

During the first five months, there was double-digit growth in spending on projects to raise living standards, according to the data.

"Faster fiscal spending is part of the government's effort to stabilize economic growth, especially when the housing market is sliding," said Xu.

However, he said, it's been shown that fiscal policy can only provide limited support for economic growth, because fiscal expenditure accounts for less than 10 percent of fixed-asset investment.

"It is more of a signal. There hasn't been a fundamental change in the policy stance," Xu said.

Fiscal expenditure in May was shown as a separate figure on the ministry's website, unlike the first four months where there was only cumulative data.

"Everyone's been anxious for support measures to restore growth. No wonder that the May data was emphasized," said Lu Zhengwei, chief economist with Industrial Bank Co Ltd.

Chinese leaders have ruled out any large-scale stimulus, given that the country is still nursing a debt hangover from the 4 trillion yuan stimulus implemented during the global crisis in 2008-09, which led to a massive buildup in local government borrowing.

The government has acted since April to steady growth through focused measures. The latest move was the decision by the People's Bank of China to cut the required reserve ratio for banks that have lent heavily to the farming sector and small companies.

The key issue for the economy remains tight liquidity, the result of stringent monetary policy, Xu said.

Along with more spending has come less revenue for governments at various levels. Fiscal revenues only rose 7.2 percent year-on-year in May, decelerating from 9.2 percent in April. The ministry said that slowdown reflected a weaker economy and falling property transactions.

Moody's Investors Service Inc said that China's current housing slowdown will likely last longer than the previous two down cycles as the nation rebalances its economy and developers work through high inventory levels.

Although more recent statistics have suggested the nation's economy may be stabilizing, the loss of momentum has rattled global markets.

In its latest World Economic Forecast, the World Bank lowered its estimate for global economic growth this year, citing disappointing economic performances in emerging economies.

The bank cut its estimate of global GDP growth to 2.8 percent this year, down 0.4 percentage point from its January forecast.

It also slightly adjusted China's growth outlook from 7.7 percent to 7.6 percent, and it said that achieving the target will depend on a successful economic restructuring.