Sharp contraction in tax receipts hampers Chinese fiscal stimulus

Sharp contraction in tax receipts hampers Chinese fiscal stimulus

Additional stimulus will likely lead to further debt issuance

Despite the severe deceleration in growth momentum in China, there are heightened hopes of additional fiscal stimulus to boost GDP growth towards the official target of 5.5% for this year. However, the covid lockdowns and the persistent weakness in the property sector have led to a sharp decline in the Chinese government’s fiscal revenue, which could limit its ability to roll out more stimulus in the near term. Additional fiscal stimulus will require the government to significantly increase debt financing.

In the first four months of 2022, the Chinese government’s in-budget fiscal revenue contracted by 4.8% compared to the 2022 annual target of 3.8% growth announced at the National People’s Congress (NPC) in March. The slump was particularly significant in April due to the widespread lockdown measures introduced in response to the Omicron wave as well as VAT refunds. Off-budget revenue contracted even more sharply, by 27.6% year on year (y-o-y) in the first four months of the year, with land sales the main drag.

In response to the slump in growth, the authorities have clearly stepped up policy support. A Rmb300 bn bond to fund additional railway construction and a Rmb200 bn bond issue to support the aviation industry has been followed by a Rmb800 bn increase in policy banks’ lending quota to support infrastructure investment. Altogether, Rmb1.3 trn of new money has been injected into the economy in recent weeks.

However, the measures announced so far may not be enough. We estimate that to have a chance of approaching the official 5.5% annual GDP target, additional spending of at least Rmb2.5-3.0 trn will be needed. Yet the drop in government tax receipts will hamper further stimulus.

There are still some tools at the government’s disposal to fill the fiscal funding gap. In the very near term, the government will likely resort to more borrowing by state-owned entities (such as policy banks). This can be relatively easily done without having to obtain the approval by the NPC. Special bond issues or an outright increase in the budget deficit could be considered to boost stimulus further. These require the NPC’s authorisation and thus would take longer to implement but could well be on the agenda in the second half of this year.

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