China May Top Off Stimulus With Record Deficit, Economist Says

China has the option of boosting stimulus by raising its fiscal deficit ratio to the highest ever, according to a top economist, a move he said would reflect the government’s commitment to this year’s growth target of around 5%.

Jia Kang, a former head of a research institute affiliated with the Ministry of Finance, said in an interview that authorities may decide on adjusting the budget this quarter and might cap the shortfall at around 4% of gross domestic product — up from the current 3% for this year.

“This can be the ‘big action’ in terms of fiscal policy,” said Jia, who now leads the China Academy of New Supply-Side Economics, a private think tank.

A decision to unshackle public spending would complement the government’s ramped-up effort since late September to revive demand in the world’s second-biggest economy. It would follow a rare mid-year expansion of the deficit in October last year to about 3.8%.

Beijing’s use of fiscal firepower has the potential to unlock between 4 trillion yuan ($570 billion) and 10 trillion yuan in stimulus, according to Jia, an amount he said may include funding from the government and private investments. Banks can play an important role in offering loans for government projects, and public-private partnerships might also contribute some capital, he added.

Economists and investors are closely watching for additional measures after China’s leadership signaled a desire to draw a line under the nation’s slowdown. The country’s top economic planner will hold a press briefing on Tuesday to discuss a package of policies aimed at boosting economic growth.

Expectations for more fiscal support, together with bolder-than-expected stimulus plans unveiled so far, have powered a world-beating rally in Chinese stocks and led to a retreat of sovereign bonds from their historic highs.

The barrage of measures in recent weeks has ranged from interest-rate cuts to rare cash handouts and steps to prop up the property market. But the focus now is increasingly on what the Ministry of Finance will do next.

While the Politburo has urged officials to “issue and make good use” of ultra-long special sovereign bonds and local special notes to drive investment, it’s provided little in the way of specifics, fueling speculation on the strength and shape of the fiscal measures.

Raising the deficit-to-GDP ratio above 3% again would send a signal that China is breaking away from an implicit ceiling on the budget shortfall it’s long tried to keep to maintain fiscal discipline.

A cap of around 4% would show the government wants to appear “both proactive and reliable,” Jia said.

In comments published last week by Chinese publication The Paper, Jia said Beijing had room for up to 10 trillion yuan in fiscal support, which could include more public spending and increased sales of long-tenor government bonds. Speaking with Bloomberg, he didn’t detail the potential size in sovereign debt issuance or give a possible timeline.

The maximum 10 trillion-yuan figure that China could generate is “not all investment by the government, but the total amount of capital that can be allocated by both government and non-government entities after policy boosts,” Jia said.

China needs to target the budget deficit at no less than 3% for 2025, Jia said, calling for a consistent fiscal policy he called “holistic” to extend the momentum into next year.

“China should stick to increasing government borrowing for growth,” he said.