China pledged to keep spending this year despite a property market slump weighing on key government revenue sources, raising hopes that fiscal expansion can provide more support for a slowing economy.

Fiscal spending in 2024 will be maintained at a “necessary intensity,” Ministry of Finance officials said on Thursday (Feb 1). Hours later, data showed that Beijing withdrew stimulus last year, with 2023’s overall deficit at 8.84 trillion yuan (S$1.65 trillion). That was lower both in absolute terms and as a share of gross domestic product than the previous year, according to Bloomberg calculations based on official data. 

The more conservative fiscal stance reflects government concerns about debt, and expectations that consumer spending would drive demand for goods and services after the end of coronavirus restrictions. But economists have argued that weak government stimulus amid a property downturn was a key cause of sluggish demand and deflation.

Top leaders have promised in recent weeks to strengthen fiscal policy, but Beijing wants to balance that commitment with managing risks from debt-ridden local authorities, as the real estate slump impacts their ability to generate cash.

The budget data showed governments at all levels in China earned around 5.8 trillion yuan in revenue selling land last year, down 13 per cent from the previous year and the lowest annual figure since 2017. 

Because of that slide in land sales, income and expenditure in the government “fund” budget, which mainly reflects infrastructure spending, missed official annual targets by trillions of yuan. But the pace of overall government spending picked up toward the year end, reaching 1 per cent growth for the full-year.

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Officials at Thursday’s briefing outlined several strategies for keeping up an appropriate pace of fiscal spending, including setting a “reasonable” size for government investment. There will be an “appropriate” increase in the amount of that investment supported through the central budget, Vice Finance Minister Wang Dongwei said at a media briefing.

China’s fiscal stance is widely expected to be more expansionary this year, with the central government taking a larger share of debt issuance. China’s headline budget deficit set to be announced next month could be set at 3.5 per cent of GDP or higher, many economists forecast. The quota for local government “special” bonds mainly used for infrastructure could also be increased.

“Fiscal policy has to be tuned higher to boost the growth,” said Woei Chen Ho, an economist at United Overseas Bank, adding that the government will probably need to increase the special local bond quota “well above” the amount in 2023.

The central government will also increase transfer payments to local authorities, Wang added – a way to address unequal fiscal resources across provinces. Beijing doled out 10.29 trillion yuan worth of those payouts to regional officials last year, he said.

Still, economists are not expecting a “bazooka” style stimulus, as China’s leaders prioritise the “quality” of growth matters as much as speed.

Wang stressed a focus on the technology and semi-conductor sectors, adding that the government wants to guide capital into manufacturing – comments that appeared to spark a brief rally in Chinese stocks. 

“The general tone of fiscal policy still sounds rather prudent,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group. “Authorities are likely focusing on its sustainability and the timing of spending.”

China will “front-load” sovereign bond issuance, Li Xianzhong, head of the ministry’s Treasury Department, said during the same briefing.

Bloomberg News has reported the government is considering the issuance of $139 billion worth of ultra long-term “special” sovereign bonds this year, which wouldn’t count toward the official deficit, to help shore up the economy. 

ANZ’s Xing said he expects special sovereign debt to come “rather late” in 2024 as the government may at first focus on selling general bonds.

Beijing can also use extra-fiscal sources of funding for state projects, which aren’t part of the government budget. 

One of those sources, local government financing vehicles, are expected to see limited spending growth this year as Beijing tries to control local government’s off balance-sheet debt. At the same time, the central bank has been providing cheap funding to “policy” banks to spend on infrastructure and real estate projects. BLOOMBERG