Recently, China issued an additional 1 trillion yuan in government bonds as a response to stimulate its economy. This was a major decision, raising the national fiscal deficit ratio from 3.0% to 3.8% of GDP. The Chinese Communist Party has long maintained a fiscal deficit rate of less than 3% of GDP, but recent economic events, particularly the fiscal squeeze following the Lehman crisis and the impact of the COVID-19 pandemic, have made this change necessary.
China’s crisis response and breaking taboos
The decision to issue the bonds signals a major shift in China’s economy, which can be seen as a response to the threat of economic stagnation. A confluence of bad news, including a real estate developer default crisis, declining exports, and shrinking consumption, has increased the need for urgent financial injections. Under these circumstances, the Chinese government’s decision is interpreted as a strong move to stimulate the economy.
Japan is also feeling the effects of the fiscal deterioration and has decided on a 13.92 trillion yen supplementary budget in response. It plans to finance much of this with government bonds, which will lead to the issuance of 44 trillion yen of new government bonds in fiscal 2023. These measures represent a significant increase compared to the Japanese government’s past strategy of issuing government bonds.
Changes in China and Japan
Both China and Japan have favored a more conservative approach to fiscal management in the past, but recent global economic conditions and internal economic pressures have caused them to move away from this strategy. In China, the decision to raise the fiscal deficit ratio cap can be seen as breaking with past taboos, while Japan is also increasing its sovereign debt issuance in the face of unexpected economic challenges.
