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Home arrow Economics arrow China’s Macroeconomic Outlook: Quarterly Forecast and Analysis Report, September 2016
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Fiscal Revenues Saw Fast Growth and Fiscal Expenditures Expanded Dramatically

In the first half of 2016, the property boom in upper-tier cities brought about the pickup of fiscal revenues. The national general public budget revenues amounted to 8.55 trillion yuan, up by 7.1% YoY (6.8% in real term). Of this total, the central general public budget revenues reached 3.72 trillion yuan, up by 3.3%, and the local general public budget revenues reached 4.84 trillion yuan, up by 10.1%.

Of the national general public budget revenues, the total tax revenues increased by 8.6% (8.0% in real term) YoY, exceeding the GDP growth rate of 7.2% (6.7% in real term), reversing the situation that tax growth lagged GDP growth in 2015 (see Fig. 1.18). The main reason is that the surge of property prices in the upper-tier cities led to the increase of those taxes directly related to real estate. For instance, contract tax went up by 14.8% YoY, the land VAT picked up by 13.1%, and housing property tax rose 8.5%. The property boom also spurred the expansion of those taxes indirectly connected to real estate, say, corporate income tax, VAT, business tax, personal income tax, and so on. For instance, corporate income tax from real estate increased by 17.3%, and income tax from transfer of property grew by 23.9%.

Property boom in upper-tier cities spurred the land market, driving the land concession fee grow rapidly. In the first half of 2016, the local government land concession fee reached 1.43 trillion yuan, up by 9.7% YoY, a sharp increase of 48.0 percentage points over the same period last year. As the land concession fee accounts for over 75% of local government funds revenues, the latter, which works as the second largest Source of local government revenues, picked up by 5.7%, a significant increase of 38.9 percentage points over the same period last year (see Fig. 1.19).

Fiscal revenues growth accelerated YoY. Source CQMM team calculations on CEIC data

Fig. 1.18 Fiscal revenues growth accelerated YoY. Source CQMM team calculations on CEIC data

China expanded the pilot program of replacing business tax with value-added tax (VAT) on May 1, 2016. Such a move was implemented due to the following three reasons:

  • • To avoid repeat tax levy to promote specialized division of labor.
  • • To link together the broken tax chain between the industrial sector and services while the two sectors have become more closely interwined.
  • • To reduce the business cost by relieving the tax burden, where the move is considered as part of the supply-side structural reform.
Fast-growing land concess fee increased goverment funds revenues YoY. Source CQMM team calculations on CEIC data

Fig. 1.19 Fast-growing land concess fee increased goverment funds revenues YoY. Source CQMM team calculations on CEIC data

It will take time to evaluate the real effects of such a tax reform. It’s now the case that, in the first half of 2016, the domestic VAT increased by 8.7%. In terms of month, it grew by 20.9% in June, an increase of 15.1 percentage points over the first five months of 2016. In the meantime, as original business taxpayers turned to pay VAT, business tax dropped by 86% in June, while the total business tax went up by 15.6% in the first half of 2016.

The change in tax structure reflects that China’s industry structure is being upgraded. In the first half of 2016, tax from the services industry rose 10.9% YoY, accounting for 58.2% of total tax revenues, 2.2 percentage points higher than that in the same period last year. In addition, tax from newly-emerging services sectors grew rapidly. Of this, tax from software and information technology services rose 39% YoY, where tax from leasing and business services sectors increased by 27.7%, suggesting that it is an important driver to boost tax growth in the services industry. Furthermore, tax from high-end manufacturing saw fast growth as well, suggesting the effects of innovation improved. Of this, tax from space equipment manufacturing climbed 11.1%, tax from pharmaceutical manufacturing and automobile manufacturing grew by 12.2 and 7.2% respectively.

In terms of region, in the first half of 2016, the growth rates of tax from the eastern region, the central region and the western region, are 12.2, 4.9, and 4.4% respectively. As modern services industry and high-end manufacturing are mainly located in the eastern regions, from which more tax revenues can be created by these fast-growing industries, making the growth rate of tax from the eastern region is persistently faster than those from the central and western regions.

To meet demands for ensuring people’s livelihood and stabilizing economic growth, fiscal expenditure maintained fast growth in the first half of 2016, up by 15.4% over the same period last year, 8 percentage points higher than the growth rate of fiscal revenues (see Fig. 1.20). The central government general public

Fiscal expenditure growth overtook fiscal revenues growth YoY

Fig. 1.20 Fiscal expenditure growth overtook fiscal revenues growth YoY. Source CQMM team calculations on CEIC data budget expenditure rose 7.2% YoY, and the local government central general public budget expenditure climbed 16.6. The main target of general public budget expenditure was on satisfying people’s livelihood. For instance, expenditures on urban and rural communities went up by 34.5%, expenditures on housing security picked up by 27.5%, expenditures on public health and family planning expanded by 23.7%, expenditures on education increased by 16.7%, expenditures for social security and employment rose 15%, and interest payments on debt climbed 38.1%.

In the first half of 2016, fiscal deficit amounted to 36.51 billion yuan. China’s budgetary deficit in 2016 reaches 2.18 trillion, meaning that the room for fiscal deficit is about 1.8 trillion yuan in the second half of 2016. As downward pressure on the economy persists, fiscal revenues is expected to slow down, while fiscal expenditure is expected to expand to support economic growth, suggesting that fiscal deficit in the second half of 2016 increase much more than that in the first half of 2016.

In summary, the first half of 2016 saw the continued slowdown of China’s economic growth. Given the relatively steady growth of consumption and persistently subdued foreign trade, the deceleration of total investment growth was the key factor of economic slowdown. Due to measures to curb excess capacity, investment in mining industry dropped sharply, and manufacturing investment growth edged down. High corporate leverage and the decline of profit growth weakened investment willingness among businesses. And the sharp drop of private investment growth reflects the lack of inner motive of endogenous investment growth. For these reasons, the downward trend in total investment growth would not be offset by either the property investment growth supported by credit expansion or the accelerating infrastructure investment growth led by the government, or both. In the second half of 2016, total investment growth is expected to slow down further, and marginal effects of investment on economic growth continue fading.

Since the global financial crises, due to the dramatic changes in the domestic and international economic environment, the previous investment-driven and export-oriented growth pattern, featured by both export and investment driven, has become unsustainable. Given sluggish external demand and increasing costs of production factors, it is urgent for China to change its current growth pattern. China’ s macroeconomic policy has to make a difficult tradeoff between near-term demand management measures and long-term supply-side structural transformation, while in the meantime addressing financial stability risks.

Nevertheless, during China’s transition from a high-middle income country to a high-income country, the domestic demand structure is being updated, and the contribution of consumption to economic growth is rising. All these have brought about not only continuous expansion of the services industry, but constant adjustment of industrial structure to meet the transformation of demand structure. And the impact of decelerating economic growth on labor markets has been so far relatively small due to the continuous expansion of the services industry. Furthermore, measures to cut backward production capacity have come into force.

Supported by various policies to reduce business cost burden, industrial production picked up slightly, and financial performance of enterprises began to improve. Manufacturing structure carries on continuous improvement, and its growth rate of profit tends to be stable. Transformation and upgrading of the industrial structure are accelerating, and the newly-emerging strategic industries grow rapidly.

In the long run, the positive effects of structural transformation would become the fundamental forces to stabilize China’s economic growth.

 
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