After three years of the COVID-19 pandemic, the financial reserves of the Chinese government (including both central and local governments) were nearly depleted. Considering the actual expenditure needs, the country's financial situation is in a precarious state. While the central government has the national credit to fall back on, the finances of many localities are effectively on the verge of bankruptcy, a situation that has been extremely rare in recent decades.
The financial situation is a crucial projection of economic development. If a country's economic growth does not lead to a corresponding increase in fiscal revenue, such growth likely involves structural issues, such as relying heavily on investment-driven growth, where the resources behind investment growth mainly come from debt expansion. Considering the past few years of China's economic growth and urbanization, the country is facing the looming shadow of a debt-driven economy.
In 2023, more than a year after the global recovery from the pandemic, China has loosened its control measures and is now entering a phase focused on economic growth. However, the recovery of the Chinese economy this year did not proceed as smoothly as expected. Apparently, relevant authorities underestimated the severity of the impact felt by its economic system. As warned by researchers at ANBOUND in March 2022, regardless of how large the country is, how extensive the market, or how much wealth accumulation there is, it cannot withstand the economic freeze caused by prolonged lockdowns or the policy-induced decoupling from the international market.
Since the beginning of this year, with China's comprehensive policy shift towards economic stability, there has been a recovery in fiscal conditions. According to data from the country's Ministry of Finance, in the first 10 months of this year, the national general public budget revenue reached RMB 18.7494 trillion, an 8.1% year-on-year increase. Among this, tax revenue was RMB 15.7841 trillion, reflecting a 10.7% year-on-year growth, while non-tax revenue was RMB 2.9653 trillion, showing a 3.8% year-on-year decrease. For the central general public budget revenue, it was RMB 8.587 trillion, a 7.3% year-on-year increase, and for local general public budget-level revenue, it reached RMB 10.1624 trillion, indicating an 8.8% year-on-year growth. Regarding fiscal expenditures in the first 10 months, the national general public budget expenditures were RMB 21.5734 trillion, a 4.6% year-on-year increase. When examining central and local levels separately, the central general public budget-level expenditures were RMB 3.0271 trillion, a 6.8% year-on-year increase, while local general public budget-level expenditures amounted to RMB 18.5463 trillion, indicating a 4.2% year-on-year growth.
Breaking down the fiscal revenue and expenditure data for the first 10 months in 22 provinces that have released this information, it appears that there is positive growth in fiscal revenue in 21 provinces. Among them, 12 provinces achieved double-digit growth, including Jilin, Qinghai, Guizhou, Xinjiang, Yunnan, Hainan, Chongqing, Shanghai, Gansu, Jiangsu, Fujian, and Beijing, where a large number of these are western provinces. Shanxi is the sole province where fiscal revenue declined in the first 10 months, influenced by both the high base effect from the same period last year and the impact of falling coal prices this year. Examining general public budget expenditures for the first 10 months, in the majority of these provinces, expenditures exceeded revenue. However, Shanghai and Fujian saw fiscal revenue surpassing expenditures.
In the first 10 months of this year, the fiscal situation in 22 provinces shows a faster growth in value-added tax revenue. This is related to a higher amount of carried-over and refunded taxes from the same period last year, coupled with a lower base. In some regions, taxes like corporate income tax and personal income tax have seen declines. For instance, in Beijing, corporate income tax for January to October amounted to RMB 131.2 billion, a 1.6% decrease. This is primarily due to the impact of reduced corporate income tax revenue from some enterprises with declining operating profits in 2022 and the final settlement and payment of corporate income tax. Personal income tax amounted to RMB 64.81 billion, a 0.9% decrease. This is mainly attributed to the implementation of special additional deductions policies for childcare, education, and elderly care for children under 3 years old, leading to an increase in personal income tax refunds during the final settlement and payment, which lowered the growth rate. Economic powerhouses like Jiangsu and Shandong also experienced similar situations. In the first 10 months, Jiangsu's corporate income tax was RMB 136 billion, a drop of by 4.7%, and personal income tax was RMB 42.6 billion, down by 1.7%. Shandong's corporate income tax was RMB 70.5 billion, reflecting a 13.2% decrease.
As expected, the significant downturn in the real estate market has notably dragged down local fiscal revenues. According to data from the Ministry of Finance, in the first 10 months, the national government fund budget revenue was RMB 4,379.5 billion, a 16% year-on-year decrease. The central government's fund budget revenue was RMB 341.7 billion, down by 5.8% year-on-year. At the local level, the local government's fund budget revenue was RMB 40,378 billion, reflecting a 16.8% year-on-year decrease. Among these, income from the transfer of state-owned land use rights was RMB 34,992 billion, a 20.5% year-on-year decrease.
Looking at the provinces that have released fiscal data, many local government fund revenues have declined. For instance, in the first 10 months, Jiangxi's government fund revenue was RMB 119.78 billion, a 16.7% year-on-year decrease, with land use rights transfer income specifically decreasing by 21.6% to RMB 98.45 billion. Chongqing's government fund budget revenue for the same period was RMB 90.06 billion, down by 15.8% year-on-year, with land use rights transfer income reaching RMB 78.93 billion, a 19% decrease. Hainan's government fund revenue for the first 10 months was RMB 28.11 billion, reflecting an 11.9% decrease. On the other hand, a few provinces have experienced positive growth in government fund revenue. For example, in the January-October period, Jilin's government fund budget revenue was RMB 33.64 billion, a remarkable 42.9% year-on-year increase, with land use rights transfer income growing by 43.4% to RMB 27.67 billion. Inner Mongolia's government fund budget revenue for the first 10 months was RMB 32.98 billion, an increase of 4.1% compared to the previous year.
Analyzing the above data reveals certain characteristics in the fiscal revenue of various regions in China, during the first 10 months of 2023:
Firstly, the most crucial factor driving the growth in local fiscal revenue is the impact of the low base from the same period last year. The excessively low base in 2022 has boosted the growth rate of fiscal revenue this year. The economic recovery leading to the growth in fiscal revenue in 2023 is only a secondary factor. This implies that the substance of fiscal revenue growth needs to be somewhat discounted. If the low base effect disappears after this year, the fiscal revenue growth rate in 2024 will not likely be as substantial as it is this year.
Secondly, the tax situation within local fiscal revenue shows a mixed picture. Nationally, there has been some optimization in the structure of fiscal revenue – tax revenue increased by 10.7% year-on-year, while non-tax revenue decreased by 3.8%. However, when examining each locality, the situation varies. In many regions, the growth in value-added tax revenue is notable, which is related to the higher carryover of retained and deferred taxes and the lower base from the same period last year. On the other hand, taxes with higher economic significance, such as corporate income tax and personal income tax, have seen a decline. This can generally reflect the challenging conditions of both corporate and personal incomes.
The National Bureau of Statistics recently announced that, from January to October, the year-on-year decline in profits of industrial enterprises above a designated size nationwide was 7.8%, narrowing by 1.2 percentage points compared to the period from January to September. Looking at the consistent negative growth in profits of large-scale industrial enterprises throughout the year, this is also to some extent corroborated by the decline in corporate income tax.
Thirdly, the "land finance" model is gradually losing its foothold in China, leading to a sustained decline in land sale revenue for the vast majority of regions. This factor's impact on the reduction of local fiscal income is expected to persist. Looking at the future trends of the Chinese real estate market, for most regions, the contribution of revenue from land finance will likely shrink. Meanwhile, the risks accumulated in the real estate sector are increasing. As real estate often involves local urban investment platforms and implicit debts, the future of "land finance" may pose a long-term negative burden on local finances.
Final analysis conclusion:
All in all, the local fiscal revenue situation in China has shown signs of improvement in the first ten months, with indications of recovery. However, the growth itself is related to factors such as a low base, policy changes, and tax calculation operations. The growth of high-value-added taxes like corporate income tax and personal income tax is not exactly promising. Meanwhile, the contribution of land transfer fees to local finances is expected to diminish. Looking at the local fiscal situation in the country, it is likely that there will be challenging times ahead.
