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Justin Kuepper

China's Misunderstood Budget, Explained

By February 13, 2013

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China's government has operated at a surplus for many years, according to official data, and only recently dropped to a 2% deficit. These figures compare to an 8.7% deficit in the U.S. and a 9.5% deficit in India, while many economists insist that the deficit remains unusually small.

These figures may be a bit misleading, however, judging by a recent analysis by the Wall Street Journal. Nearly all tax revenues flow to the country's central government, leaving many local governments to borrow from state banks and private trusts. If these local governments fail to pay back the money, they may come back to the federal government for a bailout.

So, while many economists are calling for China to increase its spending in order to stimulate domestic consumption, they should keep in mind that its capital reserves may ultimately prove necessary in order to support local government debts that could turn bad.

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