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.

More Links:
Dow Jones Technicals – 2nd Highest Close reached
AUD/USD – Rallying Back to the Key Level at 1.02
Central Banks Get To Play The Tune This Week

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Mingze Wu

Mingze Wu

Currency Analyst at Market Pulse
Based in Singapore, Mingze Wu focuses on trading strategies and technical and fundamental analysis of major currency pairs. He has extensive trading experience across different asset classes and is well-versed in global market fundamentals. In addition to contributing articles to MarketPulseFX, Mingze centers on forex and macro-economic trends impacting the Asia Pacific region.
Mingze Wu