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Huge deficit puts China near maximum debt limit
AFAR
11/17/2003



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In order to avoid possible financial difficulty this year, China’s Ministry of Finance issued a 2-year national bond on November 7. They called on demos to purchase the special saving bond as further support to the government budget. This displays the government's awareness of the difficulty involved in decreasing the public debt burden.

According to a Dow Jones News Agency report on November 9, in about six years the Chinese Government created a huge budget deficit. Analysts predict that this budget deficit will reach the limit of what the government can withstand. Although offials are reluctant to admit that government finance is at a dangerous level, they admit the ratio of budget deficit to GDP for 2003 will not be as good as had been earlier predicted; it will be much lower than the ratio of 3% for 2002.

Since it is considered suspicious that the huge fiscal expenditure has boosted the sustained growth of the economy, numerous articles have appeared in the Chinese media criticizing the government fiscal expansion policy.

The outbreak of SARS decreased government revenues and increased government accidental expenditures. Hence, the government has made little progress in controlling the fiscal deficit. There is also growing concern for the burden of government debt that would result in increased interest rates and financial difficulties for China’s credit market. According to budget projections, the Chinese government must raise about 116 trillion yuan (approximately $14 billion US) on the national bond market by the end of the year.

The credit market has shrunk due to possible inflation or interest rate increases. It is doubtful that the 640 billion Yuan needed for this year can be raised.

A market trader pointed out that the Ministry of Finance would issue the 60 billion yuan in bonds to retirees and other depositors, rather than to banks. This shows that the government lacks confidence in the demand of national bonds from the banks.

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