Fiscal spending in China rose 8.1% in 2019 comparing to the previous year, the Ministry of Finance said on Monday. The growth rate of government expenditures exceeded the GDP growth rate and as expected the change will be much larger this year due to the detrimental impact of the coronavirus outbreak on the economy. In this situation, the state should play an active role and generate demand in the economy, primarily through fiscal spending.

Treasury revenues rose 3.8% last year, less than 1% comparing to the previous year due to large-scale tax cuts by the government, the ministry said.

Fiscal expenditures amounted to 23.89 trillion yuan, while revenues were lower and amounted to 19.04 trillion yuan. Tax and tariff reductions exceeded 2.3 trillion yuan ($329.5 billion) in 2019, the ministry said, adding that it would continue to lower taxes and tariffs to mitigate the economic blow from the outbreak of coronavirus. The agency will monitor the tax burden of enterprises in various sectors of the economy, primarily small businesses and retailers which are facing with the shock in domestic consumer demand.

The yield curve in China reacted accordingly to the news by increasing a downward shift across all maturities, reflecting the NBK’s efforts to soften credit conditions:

Meanwhile, consumer inflation in China accelerated to 5.4% in January on an annualized basis. Food price inflation amounted to more than 20%, and for pork again exceeded 110% (97% in December).

The growth of the Chinese economy slowed to 6.1% last year. An outbreak of coronavirus is expected to take away 1.6% of GDP in the first quarter, however, due to recent events, the deviation is expected to be more serious.

Gold and other assets rose due to partial quarantine in the capital of Beijing, which means a return of serious concerns about the epidemic and, consequently, an increase in risk aversion. The number of victims of the virus has increased to 910. European stock indexes are trading in a slight minus, the dollar index is holding near the opening.

The economic consequences of the quarantine, which covers more and more provinces, will obviously be revised by the markets towards further deterioration, so investors should expect an inflow to safe heavens. The $1,600 gold target is once again becoming real as period of short-term market relief has ended.

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