China is fully confident in fending off systemic debt risks and expects no major changes in the government’s debt ratio in the coming years, Finance Minister Xiao Jie said on Wednesday.
The country’s debt-to-GDP ratio, an indicator of the country’s ability to pay back its debt, dropped to 36.2 percent in 2017 from 36.7 percent in 2016, Xiao said at a news conference during the ongoing first session of the 13th National People’s Congress.
A ratio over 60 percent is generally considered dangerous in that it means a country may fail to repay its debt.
“The risk level of the Chinese government’s debt is not expected to change significantly in the coming years compared with that in 2017,” Xiao said. It is still far below the global warning line and lower than debt levels of other major economies and some emerging-market countries, he said.
By the end of 2017, China’s outstanding debt had reached 29.95 trillion yuan ($4.7 trillion), with 16.47 trillion yuan in local government debt, or 55 percent of the total, according to the finance ministry.
The country revised its Budget Law in 2015 to tighten regulation over debt management, including setting the annual borrowing ceiling for local governments.
In a report that the Ministry of Finance has submitted to the National People’s Congress for review, local government debt was budgeted at 20.997 trillion yuan this year, compared with 18.82 trillion yuan in 2017.
“In line with the new Budget Law, issuing local government bonds is the only legal way for local governments to finance debt,” Xiao said, pledging to further tighten regulations on local government debt to prevent systemic risks.
While keeping a tight grip on its debt level, China will continue to adopt a proactive fiscal policy in 2018 to bolster the real economy, according to the minister.
The proposed total deficit this year is 2.38 trillion yuan, unchanged from last year, according to the Government Work Report delivered by Premier Li Keqiang on Monday. But the annual target of the deficit-to-GDP ratio is set to be 2.6 percent, down from 3 percent in 2017, representing the first downgrade since 2013.
Xiao said that a 7.6 percent increase in budgeted fiscal expenditure to 20.98 trillion yuan this year could support stronger investment in infrastructure projects, meaning it will not have any negative influence on overall economic growth. The proactive fiscal policy is also reflected by the proposed reduction of taxes and fees by nearly 1.1 trillion yuan this year to lower the operational costs of micro, small and medium-sized enterprises, Xiao said.
Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, said a lower target for the deficit ratio indicated an expectation of sound and stable macroeconomic fundamentals this year. Increasing economic vitality as a result of improving corporate performance is fundamental to fiscal income growth, Liu said.
“The lowering of the fiscal deficit target suggests that the government has become more cautious and that it wants to improve its efficiency in use of funds,” said Zhao Yang, chief China economist at Nomura Securities.