A view of the PBC's headquarters in Beijing Photo: cnsphoto

In the midst of a COVID-19 pandemic that has subdued its economy and led to a contraction of 6.8 percent in the first quarter, China is expected to raise its budget deficit to 3.5 percent of GDP this year, economists said, arguing that the record-smashing deficit-to-GDP ratio will be vital to the economy's recovery from the coronavirus assault.

The nation would certainly run a larger budget deficit this year, continuing an upward trend, Lian Ping, head of Zhixin Investment Research Institute, told the Global Times on Sunday.

The Ministry of Finance set an annual fiscal deficit target at 2.8 percent of GDP for 2019, up by 0.2 percentage points from the 2018 target.

The deficit-to-GDP ratio target for the coronavirus-plagued 2020 could be 3.5 percent or even beyond, according to Lian.

In a note sent to the Global Times, DBS economist Nathan Chow said he expects the central government to "ramp up fiscal stimulus, including increasing the budget deficit target to 3.5 percent of GDP."

Chang Shu, chief Asia economist for Bloomberg Economics, wrote in a note circulated to the Global Times that the Chinese government is likely to lift the deficit-to-GDP ratio to 3 percent, which would be the highest on record. 

A meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee on Friday also pledged to be more proactive and effective in using fiscal policy and said the nation would raise the deficit-to-GDP ratio. 

China's budget deficit has largely stayed below 3 percent of GDP since reform and opening-up started in 1978, except for 2016 and 2017 when the targets were both set at 3 percent.

Expectations for China's budget deficit to top 3 percent of GDP, a warning level recommended internationally according to the 1992 Maastricht treaty, stirred controversy over fiscal risks. Market observers, however, defused some concerns. 

The treaty that led to the creation of the euro introduced the fiscal criterion that annual government deficits must not exceed 3 percent of GDP at the end of the preceding fiscal year and that government debt is supposed to stay below 60 percent. 

The Maastricht warning is not a fiscal rule that must be abided by though. In the case of the US, its deficit peaked at 9.8 percent of GDP back in 2009 before falling to 4.1 percent in 2013, according to the US Congressional Budget Office. The office's projections in January put the nation's deficits at 5.4 percent of GDP in 2030 from 4.6 percent in 2020.

China's government debt levels are well below 60 percent, offering more leeway for an uptick in budget deficit, Lian said, noting that larger government budget deficits would help in reducing corporate debt.

Government debt normally exceeds liabilities held by the corporate sector in Western economies. It is acceptable for government debt to reach 70-80 percent.

China's outstanding government debt as a percentage of GDP stood at 37 percent at the end of 2018, official data showed. 

By the end of February, major industrial firms recorded a debt-to-asset ratio of 56.3 percent, down 0.6 percentage points year-on-year, according to figures from China's National Bureau of Statistics. 

By comparison, the US recorded a government debt equivalent to 106.9 percent to GDP in 2019, per data from tradingeconomics.com. The reading stood at 67.7 percent in 2008 and 82.3 percent in 2009.

Total US corporate debt stood at 74 percent of GDP, a Forbes story said in July 2019.

The issue with government debt lies in whether there is sufficient room for an economy to continue growth to bring fiscal revenues, Lian remarked, voicing concerns over the virus-inflicted plight of small- and micro-sized businesses that might inevitably result in bankruptcies, although it will be difficult to predict how many of the beleaguered firms, especially smaller exporters, would go bust. 

Results from a survey by Tsinghua University and Peking University of 995 small- and medium-sized enterprises earlier this year showed that 67.1 percent of the surveyed businesses reported acash balance sufficient only for two months, 85.01 percent said they could survive up to three months, while only 9.96 percent can stay afloat for more than six months. 

Lingering uncertainty over the containment of the pandemic outside of China dims the prospects for smaller businesses, necessitating the issuance of special treasury bonds and local government special bonds to bail out battered businesses, Lian said, suggesting targeted fiscal measures to ensure the survival of the business community that could consider low interest rate loans to companies facing difficulties in paying employees.