It is well-known that Chinese public finances are far worse than evident in official statistics. A lot of government spending is done outside the budget.

In its new assessment of the Chinese economy released over the weekend, the International Monetary Fund has estimated that what it describes as the augmented fiscal deficit of China is at 10% of gross domestic product. That is far higher than India’s consolidated fiscal deficit. Yet, the multilateral lender says China should maintain its augmented fiscal deficit at the existing level at a time when economic growth is slowing.

Is China on the edge of a fiscal cliff? It clearly does not have the fiscal space it had in 2008 to stimulate the economy through higher public spending. Public debt is also climbing. But a sharp fiscal correction will make the economic slowdown worse. The monetary lever is also jammed unless China wants another bubble in real estate or its financial markets. The challenges are mounting.

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