China says higher budget deficit will spur growth

China's decision to increase its budget deficit ratio to 2.8 percent this year from 2.6 percent in 2018 is appropriate for the economy, and leaves room for policymakers to manoeuvre, Finance Minister Liu Kun said on Thursday.

But a proactive fiscal policy does not mean China will open the floodgates for stimulus, Liu said at a news conference on the sidelines of the annual parliamentary meeting in Beijing, reiterating past government pledges of restraint.

Global investors are closely watching how forcefully Beijing will support the economy after growth in 2018 slowed to a near 30-year low. A key market focus is how policymakers will balance the need for growth against the threat of a further flare-up in financial risks and debt. “We will not spend a penny that is not supposed to be spent, and we'll strive to guarantee the money that is supposed to be spent,” Liu said.

Premier Li Keqiang told the opening of parliament on Tuesday that China is planning billions of dollars in additional tax cuts and infrastructure spending, amid pressure from softer domestic demand and a trade war with the United States.

The premier also announced the slightly higher target for the budget deficit to GDP ratio and a lower annual economic growth target of 6-6.5 percent, both of which had been widely expected.

For 2019, Beijing is planning cuts of nearly 2 trillion yuan ($298 billion) in taxes and fees for companies, featuring long-awaited reductions in value-added tax for manufacturing, transport and construction sectors. It has not yet announced when the VAT cuts will take effect.

Liu acknowledged that the planned tax cuts will exert some pressure on local government finances, but he pledged more funds will be transferred from the central government to localities.

“Considering the downward pressure on the economy and the upcoming policy of larger tax and fee cuts, some regions will still face relatively big budgetary pressure this year,” said Liu.

Many provinces across China are in the midst of a long-term economic transformation as President Xi Jinping urges industries to move away from low-value, polluting manufacturing.

Shanxi, a northern province traditionally known for its coal resources, is building solar plants in old mining districts in its renewable energy push, and like other provinces, has not been spared from the broader economic slowdown.

To shore up its corporate sector, Shanxi reduced taxes by 57.3 billion yuan ($8.5 billion) in 2018 and cut fees of 6 billion yuan, with 90 percent of the companies benefitting from the tax cuts being private firms, Wu Tao, head of the Shanxi provincial government's finance department, said on the sidelines of parliament on Wednesday.