China: We see no fiscal cliff in 2021

  • Due to the size of China’s economy and the government’s role in infrastructure spending, China’s budget numbers are tracked closely.
  • With factors such as a moderate 2020 stimulus, tighter controls on property market financing and planned tapering, we believe China’s economy is unlikely to overheat.
  • We view the risk of a fiscal cliff in 2021 as extremely low, and believe the key target in China is credit growth to the economy’s non-financial sectors.

Due to the size of China’s economy and the government’s role in infrastructure spending, China’s budget numbers are closely watched by global investors, especially those interested in the commodity sector. Based on the national budget for 2021, we estimate that growth in broadly defined fiscal spending could drop to -1.6% in 2021 from 12.7% in 2020 and 11.2% in 2019. Is this a fiscal cliff? We don’t think so.

China has experienced three fiscal spending growth slumps over the past decade, although we would not categorize these as “fiscal cliffs”. These slumps were driven by policy efforts, including containing surging inflation driven by a potentially overheated economy, and reducing systemic financial risks caused by a rapid rise in debt.

With moderate stimulus last year, much tighter controls on property market financing, and some planned tapering this year, we think the economy is extremely unlikely to overheat. While we expect inflation to rise, any inflationary pressures would likely be largely imported and would not reflect a hot domestic economy. Also, although debt did rise last year, the situation is not imminently serious.

With a smaller fiscal deficit and shrinking fiscal spending, markets might wonder whether China will face a fiscal cliff this year. In our view, the risk is small and concerns are overdone for reasons including:

  • In terms of the deficit-to-GDP ratio, the tapering from last year to this year is rather moderate;
  • If China’s nominal GDP growth could quicken beyond government expectations, then a growth recovery plus reflation would be positive for fiscal revenue growth;
  • Fiscal deposits rose markedly and local governments have not fully used their annual quota for bond issuance in 2020, suggesting some savings and unused bond issuance quota from last year could be used this year;
  • There could be other quasi-fiscal spending by government agencies;
  • Corporate savings surged in 2020 and pent-up demand from households will likely be released this year.

What differentiates China’s policymaking from developed economies is the choice of intermediate targets. In almost all developed economies with modern central banking, the key intermediate target is interbank interest rates, which are, in turn, managed by target rates, interest rate corridors and open market operations. In China, the key target is credit growth, and the best measure of credit growth is aggregate financing, defined as credit to non-financial sectors including the government. We expect only a moderate slowdown of outstanding aggregate financing growth from the 13.3% y-o-y in February to around 11.5% at end-2021. Such a slowdown is manageable, and average aggregate financing growth this year of 12.0% should be enough to deliver above-target GDP growth.

For more insights on China’s budget for FY2021-22, read our full report.


  • Ting Lu

    Chief China Economist

  • Lisheng Wang

    China economist

  • Jing Wang

    China economist

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