The local Chinese Communist Party (CCP) governments have long relied on land sales as their main source of income. In recent years, the sluggish real estate market and financial crises among developers have led to financial difficulties for local governments. Therefore, local governments are now seeking to collect taxes owed by businesses and individuals for decades.
According to a report by the Associated Press on August 8, more than a dozen Chinese listed companies have stated that they have been asked to pay millions of dollars in owed taxes. This is a new measure taken by the government to repair the finances of local governments that have been severely hit by the slowdown in the real estate market. The downturn in the real estate market has affected the sales of land-use rights, which are a major source of government revenue.
The VV Food & Beverage Company in China reported in June that it received a tax bill of 85 million yuan dating back 30 years.
Zangge Mining, headquartered in western China, stated that it received two tax bills dating back 20 years, totaling 668 million yuan.
After the CCP recently held the Third Plenum, the new policies introduced call for expanding local tax sources and state that there should be an “expansion of local tax administration authority” and “improvement of government debt management system”.
The local debt of CCP governments is estimated to be as high as $11 trillion, including “off-balance sheet” debts or debts owed by local government financing entities not included in official estimates. The over 300 “reforms” proposed by the CCP include commitments to better monitor and manage local debts, which is one of the biggest risks to the Chinese financial system.
The report suggests that the government’s rush to collect long-overdue taxes indicates the urgency of the problem. Experts question how the CCP will fully implement improvements to the tax system and better balance government revenue control.
Logan Wright of the Rhodium Group, an independent research company, said, “They have not made efforts to address the existing local debt problems or alleviate the constraints on fiscal capacity.”
For a long time, local CCP governments have faced funding shortages because the central government controls the majority of tax revenues and allocates limited funds to local governments. These local governments cover about 80% of expenditures, such as wages, social services, and investments in infrastructure like roads and schools.
As the economy slows down and the costs increase due to the “zero-COVID” policy, the pressure on local governments continues to grow.
The sudden tax bills have dealt a heavy blow to some businesses, further damaging the already shaky commercial confidence. Zhejiang province’s Ningbo Bohui Chemical Technology Co., Ltd. suspended most of its production after the local tax authority demanded a payment of 500 million yuan in taxes on certain chemicals. In order to meet the authorities’ demand for overdue taxes, the company is laying off employees and reducing salaries.
Professor Chen Zhiwu of the University of Hong Kong Business School stated, “When business owners feel insecure, how can private investment in China grow? Economic slowdown is inevitable.”
Due to the difficulty for local governments to maintain a balance between revenue and expenditure, some local governments are establishing “Taxation and Enforcement Operations Centers” operated by local tax authorities and police to collect owed taxes. Since 2019, such centers have been established in at least 23 provinces.
Both individuals and companies have become targets. Over the past few years, dozens of singers, actors, and internet celebrities have been fined millions of dollars for “tax evasion”.
Internet live-streaming celebrity Viya was fined 1.3 billion yuan in 2021 for tax evasion. She apologized and avoided prosecution by paying the fine, but her social media accounts were suspended, leading her business to a standstill.
The report indicates that the CCP has been reluctant to rescue struggling local governments. Therefore, the central government only intervenes in emergencies, and otherwise, local governments must solve their debt issues on their own.
The current financial pressures and massive debts of CCP local governments have become a ticking time bomb for the Chinese economy. Even with financial assistance from Beijing, it is a drop in the ocean for the huge debt predicament of local governments.