MNI: China To Maintain Modest Debt Expansion Over Next 5 Years

China will maintain proactive fiscal policy with a modest expansion of debt over the next five years as it seeks potential GDP growth of around 5% and aims to double GDP per capita by 2035, policy advisors told MNI, noting fiscal spending will increasingly focus on bolstering domestic demand. 

“The average growth rate during the upcoming 15th Five-Year Plan period should be around 5%,” said Su Jian, director at the National Center for Economic Research at Peking University, adding that a more moderate target of 4.5-5% would leave too much pressure for the 16th Five-Year Plan period (2031-2035).

Authorities will need at least 4.7% annual growth to meet the goal of doubling per capita income from 2020 levels by 2035, Su said. As China develops, its growth rate will naturally slow, requiring larger-scale fiscal expansion and a looser money supply to sustain momentum, he argued. (See MNI INTERVIEW: China’s Growth To Slow Without Model Changes–Wu)

DEBT AND FISCAL BALANCE

Zhang Yiqun, director at a fiscal studies institute under Jilin province’s finance department, said the amount of new government bonds issued annually may grow modestly from current levels, as Beijing’s proposal for the 15th Five-Year Plan released last week set a tone of fiscal proactiveness while also emphasising sustainability.

The annual amount of new central and local government bonds in recent years – excluding refinancing and temporary arrangements such as special treasuries – was about CNY2 trillion and CNY5 trillion respectively, a level authorities would need to at least maintain to ensure policy continuity, Zhang said. A substantial increase was unlikely given fiscal sustainability constraints, he added. Central government debt may rise proportionately to ease local government borrowing pressures and support the creation of a unified national market as spending responsibilities become more centralised, said Zhang.

The proposal also called for “reasonably increasing the proportion of public service expenditures to enhance consumers’ spending power,” which Zhang said would strike a balance between infrastructure-heavy investment and social welfare spending that more directly benefits households through better education and healthcare. 

While the plan highlighted a “significant increase” in the household consumption rate for the first time, policymakers are unlikely to set a numeric target, Su said. He cautioned that raising the household share of GDP faces structural challenges, and higher incomes do not always translate into stronger consumption amid uncertainty over the future. “Endogenous economic driving force, a term often used by policymakers, actually refers to boosting people's spontaneous consumption, which will also ease deflationary pressure,” said Su. Maintaining full employment, raising incomes, and strengthening the social safety net will be key to building that momentum, he added.

SUPPLY SIDE

Su said policymakers may also support demand by improving the supply of new goods and services through supply-side reforms, alongside the need for a better consumption environment, including easing restrictions in sectors such as autos and housing. “Investment in tech innovation, such as disruptive technologies, will create new demand,” Su said, highlighting the proposal’s emphasis on fostering a “virtuous cycle” between supply and demand, and between investment and consumption. (See MNI INTERVIEW: PBOC To Boost Tech Loans Via Structural Tools)

Though the plan’s top priorities – “building a modern industrial system” and “boosting technological self-reliance” – are critical to strengthening China’s competitiveness, advisors said the emphasis on demand-side management was unprecedented.

LOW INCOME SUPPORT

Zhang noted efforts to unlock latent demand will likely focus on lower-income groups such as rural residents and the elderly, potentially supported by stronger tax collection in developed regions and the creation of a unified national social security system to reduce regional inequality. He also stressed the need to expand the supply of goods and services that meet consumers’ upgrading needs as incomes rise.

Although shifting China’s high household saving culture will take time, Zhang said lower bank deposit interest rates under continued monetary easing could help encourage more spending.