Expected policy to center on boosting consumption, strengthening demand

China is likely to come up with a fiscal stimulus package during the upcoming annual meeting of the country's top legislature, including raising fiscal deficit and expanding government debt, to contain the economic impact of COVID-19 epidemic and accelerate recovery, according to officials and experts.

The government will moderately raise the fiscal deficit ratio, issue special Treasury bonds to counter the COVID-19 impact, increase local government special bonds and continually implement tax and fee cuts, to proactively offset the economic downturn, Finance Minister Liu Kun said on Thursday.

An increase in the fiscal deficit will release positive signals and stabilize market confidence, and help ease the government financing difficulties as the budgeted income for this year is projected to be lower than last year, Liu said in a statement on the ministry website.

The issuance of special Treasury and more local government special bonds will expand government-led investment, promote consumption and strengthen domestic demand, he said.

Liu stressed that the fiscal policy will be more proactive, to maintain economic fundamentals focusing on "six priorities": safeguarding employment, people's livelihoods, the development of market entities, food and energy security, the stable operation of industrial and supply chains, and the smooth functioning of society.

These economic targets were listed for the first time at a meeting of the Political Bureau of the Communist Party of China Central Committee on April 17, chaired by Xi Jinping, general secretary of the Communist Party of China Central Committee.

To implement the fiscal measures, the minister said tax relief measures would be added especially for small and medium-sized enterprises hit by the virus, including maintaining lower value-added tax rates and corporate pension rates. Also in the cards is an increase in the unemployment relief.

According to political advisers, the central government will disclose the size and usages of COVID-19 special Treasury bonds and the full-year quota for local government special bonds－the two major instruments to increase government spending, during the upcoming annual meeting of the third plenary session of the 13th National People's Congress, the country's top legislature.

Liu Shangxi, a member of the National Committee of the Chinese People's Political Consultative Conference and head of the Chinese Academy of Fiscal Sciences under the Ministry of Finance, said: "Expanding public consumption is one of the major goals of fiscal policy to offset the COVID-19 shocks." In face of the unprecedented challenges, fiscal stimulus should be used to control risks, different from the traditional role of expanding demand through increasing investment.

Some economists expressed concern that higher bond issuances, especially the local government special bonds to fund infrastructure projects, and weaker revenue due to further tax cuts and fee exemptions, may weaken local government fiscal positions and further increase their debt burden and contingent liabilities.

"To date, direct fiscal measures from the Chinese central government have been moderate and deployed with higher reliance on monetary easing," said Michael Taylor, managing director of the Asia-Pacific region at global credit ratings agency Moody's.

China's direct fiscal support differs from that of the major developed economies which includes, besides spending on healthcare and tax relief, large spending on job retention schemes and unemployment insurance, as well as direct cash payments, according to Moody's.

"Rather than housing and traditional infrastructure projects adopted in response to the global financial crisis, the target of public investment in infrastructure will be for projects such as telecommunication networks, healthcare services and facilities that promote sustainability and productivity," said Taylor.

"The funding mechanism has also shifted from government-backed bank lending to bond financing, especially for local government special bonds, which are more transparent," he said.