Fiscal policy expected to play greater role, says investment bank

China's fiscal deficit is expected to widen substantially to 2.9 percent of GDP from this year's 2.3 percent, as monetary easing saw its limit, said a leading investment bank in China.

China International Capital Corp. forecast in its annual report that after six cuts in interest rate, policy focus will shift to a greater role for fiscal policy, as monetary easing failed to boost growth, and subdued price indexes point to persistent weakness in aggregate demand.

"Despite talks of 'proactive' fiscal policy, we hardly saw a 'proactive' policy until recently," said Liang Hong, chief economist of CICC.

The bank expected next year's fiscal deficit to be 2.1 trillion yuan（$330 billion）, a sharp increase from this year's 1.6 trillion yuan. Sovereign bond issuance will pick up notably in order to facilitate investment in government-led infrastructure projects.

In addition, the scale of local government debt swap will come in between 3 to 3.5 trillion yuan for 2016, compared with this year's 3.2 trillion yuan. Policy bank bond issuance will play an active role in fiscal stimulus.

CICC sees monetary policy maintain an easing bias next year. It expected one more interest rate cut in the first half of 2016, and a total 6 percentage points cut in reserve requirement ratio.

In terms of exchange rate, the report expects the USD/CNY to trade at 6.5 by end-2016, implying relatively stable exchange rate.

The band adjusted its forecast for this year's real GDP growth rate to 6.9 percent, up from previous 6.8 percent, and 6.8 percent for next year, up from 6.6 percent. Consumer price index will come in at around 1.3 percent next year.