Advisor blames government spending for weak demand

An influential policy advisor blames slowing government spending in Q2 for weaker economic growth.

According to Zhang Bin, a deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, China’s leading think tank:

• “The decline in demand…is not from private sector consumption and investment, but from the slowdown in the growth of broad fiscal expenditure.”
• “The main reason may be the decline in local governments’ financial strength.”

Zhang said that in Q2:

• Local government financing vehicles (LGFVs) issued RMB 405.7 billion less in bonds and borrowed RMB 380 billion less in bank loans y/y
• Land sales – a key source of local government revenue – were down RMB 330.6 billion y/y
• Local governments issued RMB 376.1 billion fewer special purpose bonds (SPBs) y/y

Additionally, local governments’ fiscal revenue rose only 0.5% from January to May, down from 1% from January to March.

Zhang says local governments have tried to compensate by increasing non-tax revenues – like fines and fees – and by not paying their bills.

• “These factors have put the business environment under greater pressure.”

Zhang didn’t have a figure for Q2 government expenditure but said state spending from January to May contracted 2.2% y/y.

Get smart: The central government has ramped up its own borrowing since Q4, but this has fallen well short of what’s needed.

Our take: China relies increasingly on exports to keep its factories humming – a tenuous position given deteriorating geopolitical conditions.

• Beijing needs to borrow more soon to put the economy on a more sustainable footing.