China’s policy stimulus may worsen economic distortions: OECD, Latest Business News - The New Paper

China’s policy stimulus may worsen economic distortions: OECD

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BEIJING: China's stimulus measures will shore up economic growth this year and next but may undermine the country's drive to control debt and worsen structural distortions over the medium term, the Organisation for Economic Cooperation and Development (OECD) said in a report yesterday.

Beijing has stepped up fiscal stimulus to prevent a sharper slowdown in the world's second-largest economy, which is being squeezed by weaker domestic demand and a trade war with the United States.

Local governments will be allowed to issue 2.15 trillion yuan (S$433.73 billion) worth of special purpose bonds this year to fund infrastructure projects, a jump of 59 per cent from last year.

S&P Global Ratings estimated last year that local governments were already sitting on hidden debt that could be as high as 40 trillion yuan.

"Infrastructure stimulus could lift growth over the projection horizon, but it could lead to a further build-up of imbalances and capital misallocation, and thereby weaker growth in the medium term," the OECD said in its latest survey on China's economy.

"The stimulus risks increasing once again corporate sector indebtedness and, more generally, reversing progress in deleveraging," it said.

China's corporate debt has fallen to about 160 per cent of gross domestic product (GDP) due to a multi-year clampdown on riskier types of financing and debt, but the level was still higher than in other major economies, the OECD said.

The government in March announced tax and fee cuts of 2 trillion yuan for companies this year, which will lift its budget deficit to 2.8 per cent of GDP this year from 2.6 per cent in 2018. - REUTERS