China keeps 3 percent budget deficit goal for 2017 as debt risks grow -sources

By Kevin Yao

BEIJING (Reuters) - China's policymakers plan to keep their budget deficit target for 2017 at the same level as last year to underscore a focus on debt reduction and reform, though they have wiggle room to increase fiscal stimulus if the economy needs support again.

A budget deficit target of 3 percent of gross domestic product, unchanged from 2016, was endorsed by top leaders at the Central Economic Work Conference in December, according to sources with knowledge of the meeting's outcome.

After government investment propped up activity for much of 2016, policymakers are looking for a recovery in private investment through public-private partnership (PPP) infrastructure projects to drive growth this year.

"Fiscal policy is clear. It's necessary to maintain last year's 3 percent deficit ratio, although there is room to increase it slightly," said one of the sources, a policy adviser.

Preliminary finance ministry data this week implied an actual deficit of 3.8 percent of GDP in 2016. However, China's budget accounting allows it to use unspent money from previous years and funds from a Central Budget Stabilisation Fund so it can report a final deficit in line with the target.

The world's second-largest economy grew 6.7 percent last year, supported by higher government spending and record bank lending, though it was still the slowest growth in 26 years.

Reuters reported last week that sources said the 2017 economic growth target would be around 6.5 percent, down from last year's 6.5-7 percent.

"If this year's growth goal is not that high, there will be less pressure on the strength of policy support," said a second policy source.

The State Council Information Office, the public relations arm of the government, did not respond to a request for comment.

Total fixed-asset investment rose 8.1 percent in 2016, the slowest pace since 1999, despite an 18.7 percent increase in investment by state entities, as private investment grew just 3.2 percent, the weakest on record.

Since mid-2015 the National Development and Reform Commission, the nation's economic planner, has released PPP proposals worth 6.4 trillion yuan ($930 billion). The government has also been simplifying approval processes and offering incentives for private investment in infrastructure.

"The PPP projects will help boost private investment, but it's hard to predict how big the impact will be," he said.

DEBT RISKS

The challenge for the government is how to encourage more investment without seeing money siphoned into speculative plays such as property, or propping up failing companies.

Analysts at investment bank UBS said China's debt-to-GDP ratio could exceed 300 percent within two years, up from an estimated 277 percent in 2016 and 254 percent in 2015.

UBS estimated that government debt, including explicit and quasi-government debt, rose to 68 percent of GDP in 2016 from 62 percent in 2015, while corporate debt climbed to 164 percent of GDP in 2016 from 153 percent the previous year.

Earlier this week the central bank raised the rate it charges banks for medium-term funds, signalling it is moving to a tightening bias as it tries to manage financial risks.

Banks made a record 12.65 trillion yuan of loans in 2016 to help meet the annual economic growth target. Mortgages accounted for 39 percent of new loans, fuelling a property market boom that has recently showed signs of cooling.

"Demand for loans will be strong, given that infrastructure investment will maintain relatively fast growth, and the PPP programme is progressing," said one of the sources.

"Mortgage loans could be lower than 2016, but won't fall too significantly."

($1 = 6.8767 Chinese yuan renminbi)

(Reporting by Kevin Yao; Editing by John Mair and Will Waterman)