By: H+K China’s Government and Public Affairs Team

Today, Chinese Finance Minister Xiao Jie held a press conference on the sidelines of the NPC, where he struck an upbeat and confident tone about China’s ability to wage one of its “three critical battles” for the next three years – defusing the country’s financial vulnerabilities.

Keeping debt under control

Xiao emphasized that Beijing would work to keep local government under control by setting reasonable quotas on municipal debt issuance and continuing its clampdown on “chaotic” debt financing. He also highlighted how China’s debt-to-GDP ratio declined to 36.2% in 2017 from 36.7% in the previous year, with outstanding government debt reaching 29.95 trillion yuan (US$4.7 trillion) as moves by regulatory authorities have taken effect. In this year’s budget report, the ceiling on outstanding local government debt has been placed at 21 trillion yuan.

An unusual reduction in China’s budget deficit target

On Monday, Premier Li Keqiang announced in the government work report that China would reduce its annual budget deficit goal to 2.6% of GDP, down from 3%, marking the first cut since 2012. The unusual step underscored Beijing’s more cautious stance towards spending and intensified focus on addressing financial vulnerabilities. However, it raised worries in the market about whether curtailed government spending would drag on Chinese economic growth.

Addressing such concerns, Xiao emphasized that Beijing will maintain a “proactive fiscal policy” to support growth. For example, he highlighted an additional 550 billion yuan (US$86.95 billion) worth of planned special bond debt issuance by local governments to fund key projects this year as well as a 30 billion yuan boost to the central government budget for infrastructure investment. Most economists do expect the Chinese economy to lose some momentum this year though as the government’s de-risking efforts continue to pick up steam.

Slashing taxes and fees

This year, Xiao also said that China would push ahead with policies aimed at curtailing taxes and fees. Premier Li’s government work report vowed to cut taxes for companies and individuals by more than 800 billion yuan in 2018 as well as ensure fee reductions of 300 billion yuan. Discussing how the reduced burdens would help shore up growth and strengthen China’s competitiveness, Xiao noted that, “By sacrificing the increase of fiscal revenue, we gain enterprise performance and market vitality.”

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