One of the decisions taken at the third Party Plenum held a few days ago is the green light for a “greater autonomous fiscal capacity” to address the strong imbalance between income and expenditure. Prefectures and counties are saddled with huge debts that the bursting of the real estate bubble in China has made even more unsustainable. For its part, the Central Bank has again lowered interest rates to stimulate lower-than-expected growth.
Beijing (/Agencies) – Faced with the volume of local government debt in China – which according to official data (which many independent analysts consider underestimated) amounts to 5.6 trillion dollars – the Chinese Communist Party has decided to grant greater powers to local governments for the imposition and management of tax revenues. This is the most significant decision to be seen among the resolutions adopted by the long-awaited Third Plenum of the Central Committee of the Chinese Communist Party, held last week and whose central theme was the slowdown in economic growth, which continues even though the pandemic phase is already over.
In the more than forty pages of the statement published on Sunday, July 21, the state agency Xinhua, within the framework of a “clear division of responsibilities,” states that local governments will be granted greater “autonomous fiscal capacity,” which will allow them to increase fiscal sources and expand “appropriately” their management authority in tax matters. The financial crisis of local authorities is one of the main problems affecting the Chinese economy today. Public services to citizens, such as education and health care, depend on these entities, so their financial difficulties can lead to cuts that indirectly reduce the spending capacity of families, also slowing down domestic consumption.
Since Beijing launched market reforms more than 40 years ago, taxation and reforms to central-territorial relations have always been one of the most contentious issues. The 1994 tax-sharing reform by then Premier Zhu Rongji eased the central government’s revenue shortfall, but was accused of increasing the burden on local governments. As a result, local governments have resorted to auctioning off land use rights to raise more revenue. But the bursting of the property bubble in recent years has backfired.
According to official data from the Ministry of Finance, local government tax revenues accounted for 54% of the national total last year, compared with expenditures that accounted for 86% of the total. This imbalance is due to the post-pandemic economic slowdown that has increased concerns about the financial stability risks of China’s more than 300 prefectures and approximately 3,000 counties, some of which are mired in heavy debt.
Against this backdrop, the Party Plenum decided to establish a “long-term mechanism” to defuse the risk of hidden debt and a “reasonable” expansion of money raised through special bonds issued by local governments. Measures in the pipeline also include increasing general transfers from the central government to local authorities, transferring consumption tax collection to local governments, and improving the distribution of shared tax revenues, such as value-added tax.
For its part, the Chinese central bank has again adjusted two benchmark interest rates today, which were already at historic lows for the country, in order to revive economic growth that remains below the 5% target. The preferential rate for one-year loans, which is the benchmark for the most advantageous rates that banks can offer to companies and families, was reduced from 3.45% to 3.35%, after having been reduced for the last time in August. The five-year rate, the benchmark for mortgage loans, was reduced from 3.95% to 3.85%, after the reduction that had been made in February.
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