- China’s ambition to achieve +5% economic growth in 2022 can only be achieved with strong support from fiscal budget channeled into infrastructure investments and stabilization of social welfare.
- Generally, the Chinese government generates its fiscal revenues via four channels:
- general public revenue, comprising all taxes and administrative fees,
- governmental funds primarily from land sale revenues at regional levels,
- business profits contributed by SOE
- and, recently, special governmental debt.
- Due to the fragile nature of the overall economy, it is currently difficult for the Ministry of Finance (MOF) to raise any tax rates or increase fees. Land sales revenue are also experiencing a downturn due to policy restrictions on the real estate sector.
- Therefore, the Ministry of Finance has limited options to sustain its needed fiscal revenues without putting pressure on businesses/households or adding more debts. In this challenging situation, the government has turned to its historically profitable financial institutions, announcing during the “Two Sessions” that they are projected to contribute a total of RMB 1.65tn of profits to the fiscal cause in 2022 (attributed in the category “Fund transfer from other sources” in the graph)
- With the new Omicron wave and the on-going disturbance of China’s economy, the government’s fiscal conditions are worsening significantly. According to NBS, the government’s general public revenue is reduced by 4.8% YoY in April 2022 and the governmental fund reduced by 27.6% YoY.
- Consequently, China’s expansive fiscal policies require more alternative sources of funding, including additional profit contributions of state-owned financial institutions and possibly the “monetization of fiscal deficit”, i.e. having the central bank directly purchase debt issued by local or central governments.
Sinolytics is a European consulting and analysis company specializing in China. It advises European companies on their strategic orientation and concrete business activities in the People’s Republic.