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Published on Friday, July 3, 2020

China | How to finance the fiscal stimulus package?

This report analyzes the ways to finance this round of fiscal stimulus package and responds to the recent debate of fiscal deficit monetization. The report also makes policy suggestions to maintain Chinese public debt level and financial stability in the long term.

Key points

  • Key points:
  • The recently closed "two sessions" announced the fiscal stimulus package to economic recession amid COVID-19 pandemic and clarified to finance the fiscal stimulus conventionally through the bond market.
  • The debate of whether to finance the fiscal stimulus through fiscal deficit monetization is still relevant and meaningful given that the authorities will most likely promulgate more fiscal easing measures in the next year with the financing channels unreleased yet.
  • The debate of fiscal deficit monetization comes from significant shrinking fiscal revenue amid economic recession.
  • However, fiscal deficit monetization is still far from a policy choice as the room for conventional financial channels still large
  • In the future, the authorities should increase the ratio of central government deficit to the total public debt and make the implicit local government financing channels explicit.

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