Propping Up the Chinese Economy: Credit versus Fiscal Stimulus

IMF Blog, December 13, 2017

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Core questions:
- How did credit growth contribute to output growth in China?
- Has credit allocation worsened as the economy became saturated with credit?
- Can output growth be supported by other means, such as fiscal stimulus?
Identification approach:
- An “instrumental variables” approach exploiting the observation that provincial leaders tend to use more credit and fiscal stimulus later in their tenure independently of local economic conditions—possibly because higher growth outcomes increase the chances of their retention and/or promotion.

Key facts on credit exposure:
- As of end-2016, total social financing—a broad measure of credit—exceeded 200 percent of GDP.
- The credit-to-GDP gap—a measure of financial vulnerability—is the second highest among 44 economies covered by BIS (after Hong Kong SAR).
Estimated effects of credit on GDP:
- 2001-2008: GDP increased by 2 percent in response to a 10-percentage point change in the ratio of credit to initial GDP.
- 2010-2015: the effect of credit on output growth fell to almost zero.
Interpretation:
- The decline in credit effectiveness may reflect credit saturation and inefficient allocation (for example to overheated housing markets, inefficient state-owned enterprises, or local government financing vehicles).
- Prudent credit to efficient firms remains desirable and growth-supporting despite the low overall effect.

Fiscal multiplier estimates:
- 2010-2015: the fiscal multiplier for on-budget expenditure was 1.4.
- Interpretation: GDP increased by 1.4 percent in response to a 1-percentage point change in the ratio of on-budget expenditure to initial GDP.
- Historic comparator: 2001-2008 multiplier in China was 0.7.
Policy implication:
- Fiscal policy can effectively support growth in the face of possible shocks, including those caused by lower credit growth.
Caveats on fiscal stimulus:
- The off-budget expenditure fiscal multiplier is likely lower than the on-budget expenditure fiscal multiplier estimated here; consequently, the fiscal multiplier for a mix of on- and off-budget expenditure is also lower than these estimates.
- Future fiscal policy should be on-budget to be most effective.
- Fiscal priorities matter: historically, much fiscal stimulus targeted infrastructure and manufacturing-related spending; future fiscal stimulus should prioritize social expenditure and transfers to foster rebalancing toward services.

Recommendations based on findings:
- Reduce reliance on credit as a growth engine given its diminished effect on output.
- Use on-budget fiscal stimulus when additional demand support is needed, prioritizing social expenditure and transfers to support rebalancing.
- Maintain prudent credit allocation—target efficient firms rather than broad, indiscriminate credit expansion.
Broader assessment:
- The results support the Chinese authorities' recent efforts toward addressing financial sector risks.
- These efforts, and potential additional policies aimed at strengthening them, are reviewed in the recently completed IMF's Financial System Stability Assessment for China.

Propping Up the Chinese Economy: Credit versus Fiscal Stimulus — Sophia Chen, Lev Ratnovski, December 13, 2017 (IMF).

支撑中国经济：信贷刺激与财政刺激; IMF博客; 2017 年12 月13 日
- 支撑中国经济：信贷刺激与财政刺激; IMF博客; 2017 年12 月13 日 (Markdown version)
- 支撑中国经济：信贷刺激与财政刺激; IMF博客; 2017 年12 月13 日 (PDF)
中国経済を支える ― 与信か、財政刺激か; ソフィア・チェン, レーブ・ラトノブスキ; IMF ブログ 2017年12月13日掲載
- 中国経済を支える ― 与信か、財政刺激か; ソフィア・チェン, レーブ・ラトノブスキ; IMF ブログ 2017年12月13日掲載 (Markdown version)
- 中国経済を支える ― 与信か、財政刺激か; ソフィア・チェン, レーブ・ラトノブスキ; IMF ブログ 2017年12月13日掲載 (PDF)
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