The fiscal stimulus that China's government is providing to its economy is larger than headline deficit figures suggest, according to Moody's Investors Service.
The government's ability to maintain growth and stability through such stimulus is positive if the funds go to sectors and institutions that will foster robust and sustainable medium-term growth. But if they contribute to medium-term financial stability and economic risks, that will be credit negative for the sovereign.
In addition to on-budget spending, China's government provides support to the economy using off-budget funds, combined with spending and revenue measures by the broader public sector, including state-owned enterprises and government-owned policy banks.
The use of funds and broader public sector spending shows that the stimulus necessary to keep the economy growing at the official target rate is large, albeit difficult to quantify precisely.
Moody's calculates that the direct fiscal impulse that includes transfers in and out of funds was close to 4% of GDP over the past two years, compared to official budget deficits of less than 3%. China is targeting a moderate deficit of 3.0% of GDP in 2017, similar to the 2016 outturn. The direct impulse will remain larger.
This fiscal stimulus will result in a small rise in direct government debt to a still moderate level over the next couple of years, which is likely to be credit neutral.
However, indirect risks to the government's balance sheet from contingent liabilities will mount due to proactive spending by the public sector at large.