Finance Minister says policies to boost R&D investment and tech innovation

China will step up fiscal policy support to the new economic development pattern by being largely reliant on expanding domestic demand and facilitating technology innovation, Finance Minister Liu Kun said on Friday.

Fiscal policies can be made more effective to moderately lift public consumption and stimulate consumer consumption by increasing the personal incomes of the medium-and low-income groups. That will help form a broad domestic market in the world's second largest economy and sustain its economic growth, Liu said in an article for the Study Times.

Liu said that government spending will support the country's large and strategical technology projects and the construction of national laboratories. Fiscal measures will look to encourage technology innovation of enterprises and increase the investment on research and development.

Preferential tax policies will also be launched for firms that invest in basic research, the finance minister said.

Liu said the fiscal policy is the foundation of national governance, which can help implement the country's 14th Five-Year Plan (2021-25) and the long-term goals by 2035, as government spending will focus on boosting investment, upgrading industrial chains and supply chains, improving people's livelihoods and securing employment.

The new growth pattern of dual-circulation－it aims to promote domestic supply and demand as drivers of economic growth－requires the fiscal policy to remain supportive of growth, said analysts, but that may need to be funded by higher debt.

China will expand investment pace, taking advantage of the central government's investment in infrastructure, and use the local governments' special bonds effectively. Fiscal support will ease financing difficulties of small and medium-sized firms, improve the housing market and housing guarantee system, promote a balanced development of the financial and property sectors, as well as the real economy, said Liu.

Zhang Lianqi, a policy adviser to the Ministry of Finance, said that Liu's article has indicated the basic fiscal policy tone for the upcoming annual Central Economic Work Conference, which is often held in mid-December.

However, a report from Moody's Investors Service, a global credit ratings agency, has warned that funding gaps－formed by decreased government income and larger spending, may widen next year, forcing local governments to once again rely on State-owned enterprises to fund investment in public infrastructure projects.

The finance minister also expressed his concern on government debt and potential risks and called for maintaining fiscal sustainability based on a reasonable assessment of the fiscal income and expenditure, and prevent "being divorced from the reality and living beyond its means", which will affect the sustainability and stability of the fiscal system.

"We will build a local government debt financing mechanism, with standardized management methods, clear responsibility, open and transparent operation, and the risks will be controllable. We will strengthen the prevention of risks related to local governments' contingent liabilities," he said.

Fitch Ratings, another global ratings agency, said it maintained a "stable" outlook for local and regional governments in China and their related entities in 2021. It said the outlook will be supported by the country's economic recovery trajectory.

Gradual improvements in the fiscal performance of local governments should alleviate the impact from higher debt this year, said Terry Gao, managing director of Fitch (Hong Kong) Ltd.