China’s 2% Budget Deficit – Higher Spending = Better Economy

China’s Ministry of Finance projected a spending increase of 10% to 13.8 Trillion Yuan ($2.2 Trillion USD). This proposed budget will create a deficit of 1.2 Trillion Yuan (US$190 Billion), a 50% increase from 2012’s deficit of 800 Billion Yuan. This would put the deficit at around 2% of 2013 GDP, which is expected to grow 7.5% from 2012. This increase in spending is purposed for growth, with a large part of the spending purported to finance proactive fiscal policies. There is also a focus on social welfare, which will certainly help to grow domestic consumption rate and is definitely good news for exporters to China such as Australia and New Zealand.

Weekly Chart

CNY strengthened slightly, with USD/CNY falling 60 pips following the budget announcement. However, as PBOC’s grip on Yuan remain strong, it is unlikely that we’ll be able to see USD/CNY falling significantly in the weeks to come even if outlook of China improves. Traders should watch out for the new appointment of PBOC Governor announcement which is expected to be announced by Mar 16th. Recently we’ve seen PBOC allowing Yuan to strengthen, and reducing monetary base to curb inflation and the asset bubble from getting out of hand. However, all these operations were under the stewardship of current Governor Zhou, who is expected to retire. These actions, though understandable, seems to go against today’s budget announcement which is growth focused. If the new Governor wishes to support growth via easing measures, we could see USD/CNY pulling higher to support exports. However, things may not be as straight forward for the next PBOC honcho, as a weaker USD/CNY will erode purchasing power which will affect domestic demand, something which the Chinese Government want to address this year with the focus on social welfare. Hence, the 1st statement of the new Governor (whoever it may be), will become critical in USD/CNY’s direction.

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