A very short note by the IMF in the run-up of China’s latest Article IV consultations suggests that the country’s fiscal position is much weaker than official statistics suggest. The augmented fiscal deficit of the country, including local government off-budget funding, is estimated to have climbed to around 10% of GDP.
“[China’s] growth has become more dependent, perhaps too dependent, on the continued expansion of investment, much of it in the property sector and much of it involving local governments whose financial position is being affected as a result…Infrastructure investment has become local governments’ main strategy to foster growth and a preferred countercyclical tool, especially during the global crisis. However, local infrastructure spending has mainly been financed off-budget, either through land sales or Local Government Financing Vehicle (LGFV) borrowings.”
“IMF staff have developed a new ‘augmented’ concept [of government finances] in an attempt to capture these off-budget fiscal activities, which expands the perimeter of the government to include off- budget and LGFV activity. LGFVs are different from other state-owned enterprises (SOEs) as LGFVs are largely set up, owned, and operated by the local governments; they engage in economic activities that are fiscal in nature; and the government directly or indirectly shares the debt servicing responsibilities, and sometimes subsidizes their losses.”
“IMF staff estimated that augmented government debt has risen to nearly 50% of GDP in 2012 [versus 23% official estimate], having increased sharply through the global crisis…For 2012, staff estimate that the augmented net borrowing was around 8% of the GDP and the augmented fiscal deficit was of the order of 10% of GDP [versus 2.2% official estimate]. “