CHINA’S leadership underwhelmed investors with a seemingly restrained 2024 budget plan. But a closer look beyond the headline numbers suggests the package could pack a bigger punch than initially thought.

China kept its official budget deficit target unchanged at 3 per cent of gross domestic product, but that underplays government support because it leaves out a large amount of investment spending.

Using the simplest definition of stimulus – the demand injected into the economy by government spending minus the purchasing power removed via taxes and fees levied – the fiscal package in proportion to the size of the economy is the strongest since 2020, when China moved to shore up growth in the face of the pandemic.

A persistent property crisis and stubbornly weak domestic demand make the case for strong stimulus measures to meet a government goal to expand gross domestic product by around 5 per cent this year.

Regardless of how the latest spending plan is measured, some economists are already predicting that Beijing will add to it later this year.

Here are answers to key questions on China’s fiscal plans.

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1. What is the basis for China’s 3 per cent fiscal deficit target?

There is a lot of history behind that number. Central government authorities for decades have viewed the 3 per cent ratio as a maximum, because it conveys a disciplined approach. It is the same guideline European policymakers set for qualifying for the euro area back in the 1990s, although many in the bloc now miss it.

With Covid and other challenges, China has crossed the line a number of times over the years, and some government-linked economists have argued against it. Last year’s figure was 3.8 per cent, the biggest in three decades. While the 3 per cent target this year disappointed some observers, it left room for expansion later. And a government spokesperson said it will help lift foreign investor confidence.

China’s official deficit breaks down like this: It represents the gap between outlays on things such as services and defence, and what the government makes mainly in tax revenue. In value, the 2024 figure is projected at 4.1 trillion yuan (S$762 billion). It then sells bonds to make up for the shortfall.

2. Why might that not be the most accurate gauge of the government’s fiscal stance?

The trouble is that it leaves out China’s other fiscal accounts. The largest of those is the “government-managed funds account”, which covers investment in construction projects, as well as income derived mainly from land sales. This account usually has a large deficit, made up by bond issuance. Combining that with the general budget, the shortfall amounts to 11.1 trillion yuan, or almost triple the size of the official fiscal deficit.

National authorities can also unleash leftover funds from prior years, as well as cash transfers from other fiscal accounts, such as profits submitted by state-owned enterprises. Officials have said that most of the roughly one trillion yuan raised from October’s additional sovereign bond issuance will be used in 2024.

“The fiscal numbers are pretty decent, a pretty solid additional impulse from last year” overall, said Andrew Polk, a co-founder of the research consultancy Trivium.

3. How large is the stimulus relative to the past?

Zooming out, the planned 11.1 trillion yuan figure for the augmented fiscal deficit – an estimate of all the main fiscal resources – is equivalent to 8.2 per cent of GDP this year, according to Bloomberg calculations based on Ministry of Finance data. That would represent the highest deficit-to-GDP ratio since 2020.

And the tally could end up representing even more than 8.2 per cent, thanks to deflation. That is because that figure is measured against nominal GDP, which includes the growth of prices. If price growth is weak or negative, that 11.1 trillion yuan deficit will represent a bigger slice of the pie.

China incorporated inflation of above 2 per cent in its budget, according to economists at Galaxy Securities. But if price growth comes in lower than that – as most economists expect – it would increase the deficit-to-GDP measure.

4. Is there enough stimulus to achieve the official GDP growth goal?

Economists say it is hard to tell. That is because the expanded on-budget spending will be offset by a separate central government campaign to rein in risk from debts taken on by regional officials.

Construction spending funded by China’s thousands of local government financing vehicles (LGFVs) has traditionally played a big role in stimulating the economy – even though this is not part of any official budget, earning it the name “hidden” debt.

But LGFV borrowing will be tightly controlled this year, with Beijing vowing to “firmly contain new hidden debt risks”. China has also ordered 12 regions seen as having more risky debt to limit new projects and suspend some already underway.

There is also the risk that local governments cannot find enough cash-flow generating projects to invest in – part of the reason there are leftover funds from previous years.

Finally, the budget appears to have overestimated revenues to be earned from land sales, with its projections implying they will be broadly flat compared to last year, according to UBS Group chief Asia economist Wang Tao. Wang forecasts a 10 per cent decline, which could leave a gap of more than 500 billion yuan.

“Maybe the leadership expects things to improve, or at least not get worse. That is a little ambitious,” Wang says. “It is likely they will cut their spending if there is a shortfall.”

5. What else can Beijing do?

Economists expect policymakers to turn to “quasi-fiscal measures” that finance government spending without adding to the headline deficit. For instance, the central bank can release low-cost funds for state-owned banks via its Pledged Supplemental Lending programme, which they have recently used to fund property projects.

That facility could “very easily” add one trillion yuan this year, Polk of Trivium said.

Beijing could also resume a programme used in 2022 that allowed the policy banks to issue bonds to invest in infrastructure. The mid-year expansion of the annual budget last October has led some economists to expect a similar move this year.

“There are several options available for the government to raise more funding later this year if necessary,” Goldman Sachs Group economists including Lisheng Wang wrote in a note. BLOOMBERG