27 Jun 2017 3 min read

Leviathan to the rescue—Gauging China’s fiscal space

By Erik Lueth

Just as Hobbes’ Leviathan saves the people from the horrors of constant struggle and chaos, we ask whether the Chinese state can save the people from a hard landing.


As discussed in my last blog, we take it as a given that Chinese growth will slow as the economy works through the credit excesses of the last few years. A key question is whether this slowdown will be gradual or abrupt and this, to a large extent, depends on China’s fiscal space.


The government’s official deficit amounts to 4% or so of GDP, but that’s not the whole story. Stimulus is often administered through off-budget vehicles or state-owned enterprises and financed by policy banks. Including these implicit government outlays the deficits swells to about 12.5% of GDP. Part of this is financed by land sales, leaving still 10% of GDP in debt-creating yearly flows.


The stock of debt came to a little under 70% of GDP at the end of 2016, including official and implicit government liabilities.


While these numbers look daunting, they need to be seen against an economy growing at 9% in nominal terms. Consider the following scenario: China increases its deficit by 2% of GDP each year, thereby maintaining growth at 6.5%. In this case government debt would rise from 68% to 105% of GDP over five years.

While far from negligible, government debt of around 100% of GDP does not look unsustainable, given China’s size and savings rate. In addition, China has significant state assets amounting to at least 50% of GDP. To be clear, the scenario in the table above is no forecast, but a mere illustration of China’s fiscal space. It suggests that Leviathan remains a force to be reckoned with.

Erik Lueth

Global Emerging Market Economist

Erik identifies investment opportunities across emerging markets. He uses quantitative models, past experience and lots of common sense. Prior to joining LGIM, Erik worked for a hedge fund, a bank, and the IMF.

Erik Lueth