After the Chinese government lifted the pandemic lockdown, there was optimism that the economy could recover. The official narrative emphasized the “theory of economic brightness” while suppressing the voices of many scholars. However, now the reality of financial and stability control seems to be slipping out of their grasp as the Shanghai index recently fell below 2800 points, revealing the true state of China’s economy.
In the first half of this year, several areas in China conducted tax inspections and initiated specialized actions to dispose of assets through “smashing iron and selling pots.” In July, the Third Plenary Session of the Chinese Communist Party increased the autonomy of local financial resources, expanding local tax sources by gradually devolving consumption taxes to local levels and integrating additional local taxes. The authority to manage mainly non-tax revenues collected by local governments will be appropriately decentralized, including highway tolls. Over a decade ago, the Chinese government had progressively abolished tolls on ordinary roads (non-expressways) but has since reinstated them.
Online users in mainland China expressed concerns about the authorities’ widespread taxation and delegation of toll collection to local levels, accusing the government of “money grab.”
A report by the Chinese National Finance and Development Laboratory indicated that the self-sufficiency rates of the finances of 31 provincial-level administrative regions in China had decreased to a certain extent from 2015 in the first half of this year. Nearly half of the provincial regions experienced a self-sufficiency rate decrease of over 10%. Furthermore, in about one-third of the provinces, the self-sufficiency rate of finances was lower than pre-pandemic levels, with approximately one-third below the previous year’s rate.
The self-sufficiency rate of finances is the ratio of general public budget revenue to general public budget expenditure. The report mentioned that due to expenditure growth outpacing revenue growth, the range of expenses supported by local government revenue has become increasingly limited.
According to data from the Chinese Ministry of Finance, in the first seven months of this year, national tax revenue decreased by 5.4% year-on-year, while general public budget revenue declined by 2.6% compared to the same period last year. However, another major component of general public budget revenue—non-tax revenue—contrarily increased by 12%, with local data showing a growth of 26.5% in fine revenue.
In addition to fines, many regions are expediting the handling of state-owned assets to alleviate debt. Several provinces and cities have set up special teams for “smashing pots and selling iron,” following the central government’s directive.
Sun Guoxiang, a professor at the Department of International Affairs and Business at Southern China University, expressed to the media that the government’s continuous emphasis on the “theory of economic brightness” over the past two years aimed to boost market confidence through positive propaganda but failed to address the real economic issues as structural problems remain unresolved.
He stated that the shift towards relying heavily on fines and non-tax revenue to offset fiscal deficits highlights the growing financial gap faced by local governments. Traditional sources of revenue such as taxes and land sales have significantly decreased, prompting authorities to resort to unconventional means to address fiscal challenges. However, these measures are not only short-term but also unsustainable.
The Wall Street Journal noted that the sluggish real estate market in China has led local governments to seek additional sources of income. A report from the Chinese National Financial and Development Laboratory attributed the financial strain at the local level to the “impact of industrial transformation and decline in the real estate market.” But is that the full picture?
Sun Guoxiang emphasized that the financial crisis of local governments is not solely due to industrial transformation or the real estate market downturn. Behind these issues lie deeper economic structural contradictions and long-term fiscal pressures resulting from governmental policies.
With the economy on a downward trajectory, consumer spending continues to decline. For instance, in the first half of this year, 30,000 noodle shops and over a million other dining establishments in China closed down.
In Beijing, profits of the catering industry sector declined by 88.8% year-on-year in the first half of this year, with a profit margin as low as 0.37%. However, the number of food delivery and takeaway personnel increased by 49.7%, with analysts attributing this to a significant rise in unemployment.
Yang Ping, a freelancer in Zhengzhou, remarked that the job market has been challenging. Many of his friends struggle to make ends meet, some borrowing even small amounts like 1,200 yuan. He highlighted the tough situations faced by many, especially those with unstable or no fixed incomes.
Yang expressed pessimism about the future and the economic hardships faced by businesses. He observed a pessimistic sentiment among friends who run businesses, foreseeing more social disasters on the horizon due to increasing financial difficulties impacting people’s lives.
An independent scholar in Beijing, Huai Sheng, also noted the prevailing economic downturn across various sectors. He recounted an incident at a gas station where he noticed a significant staff shortage, emphasizing the impact of the dwindling business on employment opportunities.
Huai Sheng further stated that the current financial challenges faced by local governments are not just limited to industrial transformation or a downturn in the real estate market. He argued that these issues highlight more profound economic structural contradictions and prolonged fiscal pressures caused by policies.
The tightening financial situation of local governments in China seems to be exacerbating, evident from the recent measures like “smashing pots and selling iron” aimed at temporary solutions rather than addressing the root problems. This could potentially lead to increased fees and taxes. Such actions, besides causing a wave of business closures among small and medium-sized enterprises, may also prompt foreign companies to reduce investments in China due to concerns about unstable policies. As financial pressures on the general public continue to mount, social disparities are likely to intensify.
Regarding policies such as housing retirement funds, which stirred massive social backlash, forcing the government to respond and dispel rumors, indicating a growing public distrust in government policies.
When the government fails to effectively tackle financial issues and stabilize public sentiments, broader social discontent can emerge, posing a threat to political stability in China.
Huai Sheng expressed skepticism about the future of China’s economy under the Communist Party’s regime, highlighting the government’s reluctance to allow the free development of private and foreign economy sectors that are perceived as non-socialist ideals. The inefficiency of the state-owned economy and its ties with corruption suggest that significant changes might not be possible under the current governance. Despite financial tensions, the authorities have yet to downsize officials at various party levels or restrict the salaries of senior management in state-owned enterprises. He warned that the current measures to address financial crises might further hinder the grassroots economy, leading to more bankruptcies of small and medium-sized enterprises and potentially sparking social unrest.
Sun Guoxiang echoed similar concerns about the severe debt crisis facing local Chinese governments. He emphasized that merely resorting to stopgap measures like “smashing pots and selling iron” does little to address the fundamental issues, which could result in a more stringent approach to fees and tax collection. This could lead to a wave of bankruptcies among small and medium-sized enterprises and potentially hinder foreign enterprises investing in China due to concerns about policy instability. The financial pressures faced by ordinary citizens are likely to heighten, escalating social tensions.
The economic downturn, coupled with widespread financial difficulties among the general population and governments scrambling for revenue, raises questions about the potential changes or upheavals that may unfold in China. As uncertainties grow, the economic and political landscape in China appears increasingly precarious, with implications that extend beyond financial stability to the broader social fabric.