Signs of slowing domestic economic growth have been increasing this year, alongside intensifying China-US trade frictions. This combination of factors has, in turn, increased the pressure on China even as it dealt with its economic downturn and increased the urgency of coming up with a solution to maintain the overall stability of China's macroeconomy. At the previous State Council executive meeting, Premier Li Keqiang expressed that the Ministry of Finance needs to "go forward" to incentivize the financial sector to take more initiative. But how exactly should the ministry "go forward"? Amongst local scholars, this question has evolved into a heated debate about whether or not the fiscal policy can be allowed to exceed a deficit rate of 3%.

In the opinion of the Vice President of the Chinese Academy of Social Sciences, Gao Peiyong, China must indeed ensure that its fiscal deficit rate should not exceed 3%. According to Gao, in order to stabilize the economy, the cost of fiscal deficit can be disregarded when a country is undergoing rapid economic growth. However, this cannot be the case during the stage of high-quality development, when risk prevention is of utmost priority. "We must be extra careful about risk prevention. It is a battle that we cannot afford to lose." Gao further emphasized that vigilance against deficit levels needs to be increased. "At least in today's China, the rate of the fiscal deficit should be locked in at less than 3% of the GDP… This measure is necessary not only to control financial risks but also to serve as an account that will directly influence and set the expectations of the general public.

However, the Former Director of the People's Bank of China's Institute of Finance, Yao Yudong, is of a different opinion. He believes that China's fiscal deficit can be increased to 4%. According to Yao, the lack of collateral has affected the transmission of monetary policy. "Now, we need to support the private economy, private enterprises, as well as small, medium, and micro enterprises. If we simply leave it to the small and medium-sized banks to provide the support, these banks will say that they want money from the big banks or the central bank, but how can they give you money if you do not have any collateral? This is where the contradiction lies." Yao further opines that currently, the national debt is the only viable main source of finance. "Globally, China's government debt to GDP ratio is relatively low—we are only at 15%. Japan, the United States, and Europe all have much higher ratios than we do. Clearly, there is an insufficient supply of bonds." Yao expressed that the central government must increase its fiscal deficit "from 2.7% or below 3% to 4%." "Our fiscal deficit should exceed 3%, who said that 3% is the limit? Throughout the EU, this limit has been exceeded. This '3% limit' has become some dogma when in reality it is completely fine to exceed it." Furthermore, he expressed that "the central government can leverage first. After leveraging it can go back to deleveraging—wouldn't that do the trick?"

The chief economist of Evergrande Group, Ren Zeping, is also of the opinion that the fiscal deficit should exceed the so-called red line of 3%, and that "the deficit rate should be raised next year and large-scale tax cuts should be implemented without being subjected to the 3% limit." Ren also posed a rather pointed question: "People who engage in finance must be clear about this: do they want fiscal balance or functional finance? Is the government really concerned about maintaining its own fiscal balance when the economy is not good? How will businesses survive? Are we supposed to wait till the economy is good again before we implement tax cuts?" Ren believes that at this point, it is no longer necessary to do so. Rather, he thinks that both fiscal deficit and tax cuts should be increased when the economy is bad; this is how functional finance works to iron out the fluctuations of the economic cycle.

With regard to the question of whether or not to raise China's fiscal deficit, Anbound already made its stance clear a long time ago. According to the findings and estimations of Anbound's Research Team, China still has room to expand its deficit rate in the future. Taking into account the need of both balanced economic growth and control financial risks, the government should recalibrate its warning lines to a fiscal deficit of 4.5% and its debt burden of 55% for the next period. This means that the government still has room to increase its fiscal deficit in the coming period. It is also worth noting that while a warning line of 4.5% is higher than that of the EU's (which is at 3%), it is still much lower than both the US' 7% deficit and Japan's 6.2% deficit. Since the current deficit rate of EU countries is much higher than the 3% standard, we are convinced that the 4.5% deficit rate warning line is both viable and opportune. Likewise, setting the warning line for the debt burden of the Chinese government at 55% is still a much stricter standard than the 60% limit set out by the 1992 Maastricht Treaty, let alone being a much lower rate than the actual debt burden of many developed countries.

Considering the many challenges, the Chinese economy is currently up against, it is no wonder that the government is eager to put in place a proactive fiscal policy. Based on Anbound's findings from the end of 2017, China will need to invest between 30 trillion to 50 trillion RMB in large-scale stimulus packages in the future. However, the proposition of implementing such large-scale stimulus packages was called into question by many officers and deemed not feasible because it went against the theme of deleveraging of the year 2018. The good news, nonetheless, is that changes in the economic situation are now turning the tide in the direction that we have proposed. After all, Anbound's seemingly radical proposal is really a proposition that was based on a thorough and rational analysis of China's economic and social system. Moreover, China's current economic capacity, which stands at more than 80 trillion RMB, is significantly larger than it was when the RMB 4 trillion stimulus package was introduced. In the face of the complications that the Chinese economy is currently undergoing, the main function of any large-scale stimulus package would be to expand the market, that is, to create more demand through market expansion and to in turn create more business opportunities and provide a lifeline for enterprises. In our opinion, this takes priority over providing enterprises with a single source of funding or credit support.

All in all, given the domestic and external challenges that China is currently up against, it is exceedingly crucial that decision makers in China can objectively assess the country's current economic situation, it is only through an objective analysis that appropriate countermeasures can be formulated and targeted adjustments can be carried out. Chan Kung, the chief researcher of Anbound, has warned that China is already in the midst of an economic and financial crisis, albeit not a full-blown one—China is not preparing itself to face a crisis in the future. Juxtaposed with the current state of economic crisis that we are in, the need to prevent risks seems much less urgent. However, some people are ill-equipped to cope with risk, like an apocalypse. Nonetheless, Anbound is convinced that China is already at risk at the moment; it is already in the midst of an economic crisis. We have much bigger problems to deal with right now than the management of financial risk. Under such circumstances, the foremost question we need to ask ourselves is how we are to handle this crisis. What major policies need to be introduced? What does a dispute like that over the limit of the fiscal deficit matter in the larger scale of things?

Final Analysis and Conclusion:

The Chinese economy is now facing complex and unprecedented circumstances. Pressure is building as a result of the macroeconomic downturn, the external environment for trade and investment is deteriorating, and the country is already sinking into an economic crisis. If China wants to take advantage of and realize the potential of its huge domestic market, it will need to launch a large-scale stimulus package at the opportune moment. A fiscal policy that involves China "going forward" will see that the current deficit rate of 3% can easily be surpassed.