China's finance minister seeks to soothe fears on debt

Seeking to douse fears about China's economy, the finance minister said Monday that Beijing can manage its rising debt load as it steps up deficit spending to prevent a slide in growth.

The deficit target of 3 per cent of gross domestic product announced Saturday, up from last year's 2.3 per cent, is in line with the ruling Communist Party's long-term reforms, Lou Jiwei said. He spoke at a news conference during the annual meeting of China's legislature.

Chinese leaders, long seen as skilled managers, are scrambling to reassure companies and investors the world's second-largest economy is on track following stock market and currency turmoil.

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Growth has declined steadily as the ruling party tries to steer China toward a self-sustaining expansion based on domestic consumer spending instead of trade and investment. But an unexpectedly sharp deceleration over the past two years sparked fears of politically risky job losses and prompted Beijing to launch mini-stimulus measures.

"We are increasing the debt-to-GDP ratio to support achieving a medium- to high-speed rate of economic growth," said Lou. "Why do we do that? Because we don't want to see a decrease in economic growth and because we want to give strong support to structural reform."

Lower growth target

The Chinese leadership has lowered this year's economic growth target, also announced Saturday at the opening of the legislature, to 6.5 to 7 per cent from last year's "about 7 per cent." Growth fell last year to a 25-year low of 6.9 per cent, though that still was among the world's highest.

On Sunday, the chairman of the Cabinet's planning agency said there was no danger of a "hard landing," or dangerously sharp drop in growth.

Lou, the finance minister, acknowledged China's overall debt load has risen, partly due to stimulus spending in response to the 2008 global crisis. But he said the government still can afford to finance its deficits.

Government debts are "not very high" at 11 trillion yuan ($2.3trillion Cdm) or the equivalent of 40 per cent of GDP, Lou said. That compares with over 230 per cent of GDP for Japan, which is struggling to restore balance as its populationages, driving costs for health and elder care higher.

"The central government has room to continue to issue bonds," he said.

Concern about local government debt

Lou said Beijing needs to do more to control debts owed by local governments. A rapid run-up in such debt has raised concern about possible defaults and the impact on the state-owned banking system.

Last week, Moody's Investors Service cut its outlook on China's government credit rating from stable to negative, citing rising debt, capital outflows and "uncertainty about the authorities' capacity to implement reforms."

A Chinese deputy finance minister retorted that Moody's was wrong and shortsighted in comments Friday reported by the government's Xinhua News Agency.