- The Chinese economy’s recovery process is fragile, with the latest economic data in July again showing signs of slowing down.
- However, the Chinese government’s efforts to revive the economy are restrained by high debt levels and decreasing tax revenues.
- In the first half of 2022, the top 10 tax revenues totaled ¥9.7 trillion, 12 percent lower than the tax revenues during the same period of 2021.
- The largest decrease comes from domestic VAT, which decreased by ¥1.6 trillion during the first half of the year, 46 percent in year-on-year comparison. The government’s large-scale VAT refund campaign accounts for most of the VAT revenue decrease. This policy impact excluded, the domestic VAT decreased by 0.7 percent, still massively below the growth in 2021 (+11.8 percent YOY).
- Another tax category causing significant revenue reductions are taxes related to land and real estate, including land VAT, real estate tax, deed tax (契税) and others. The sum of all these taxes reached ¥1.1 trillion during the first half of 2022, 7.1 percent lower than that in H1 2021. The tax revenue decrease is driven by the shrinking transactions over real estate in China, due to previous regulatory crackdowns on the real estate sector and pessimistic expectations regarding property prices.
- The tax revenue decreases raise the question of how much further stimulus the government can provide to revitalize the Chinese economy weakened by covid disruptions.
Sinolytics is a European research-based consultancy entirely focused on China. It advises European companies on their strategic orientation and concrete business activities in the People’s Republic.