The impact of a struggling economy on tax revenue has led to the largest contraction in China’s fiscal income in over a year, according to data released by the Chinese Ministry of Finance. Analysts suggest that this may prompt the Chinese Communist Party to adjust the budget again by the end of the year to support the fragile economy.
From January to May this year, including both the general public budget and government fund budget, the total revenue of the Chinese authorities decreased by 4.1% year-on-year to 11.36 trillion yuan (approximately 1.6 trillion US dollars). According to Bloomberg’s calculations, this is the largest decline since February 2023.
In the first five months, the combined expenditures of these two items also dropped by 2.2% year-on-year to 13.61 trillion yuan. The fiscal deficit reached 2.25 trillion yuan, expanding compared to the same period last year.
Slower economic growth has dragged down tax revenue, while years of a sluggish property market have significantly reduced government land sale revenue, putting pressure on the government budget. Local officials are requesting several enterprises to pay taxes from decades ago to fill the financial gap caused by the housing crisis.
In recent months, the Chinese Communist Party has accelerated bond issuance to raise funds to provide more support to the economy, along with launching government subsidy measures to stimulate the replacement of old cars and other consumer goods.
However, real estate investment, sales, and some key monetary indicators have continued to worsen, hitting historic lows and raising concerns about sustained weak domestic demand.
In a rare move last October, the Chinese Communist Party adjusted the budget mid-year by issuing an additional 1 trillion yuan of national debt to aid the economy, raising last year’s fiscal deficit as a percentage of the Gross Domestic Product (GDP) to 3.8%.
In March this year, the Chinese Communist Party set the fiscal deficit target at 3% of the GDP, part of which will be filled by issuing 3.34 trillion yuan of sovereign bonds. Additionally, Beijing plans to sell 1 trillion yuan special national debt to fund key project investments.
Pang Ming, Chief Economist for Greater China at Jones Lang LaSalle, stated that the announced budget deficit rate during the National People’s Congress in March was actually lower than expected, and this figure may be revised upward in the coming months. Yu Yongding, a former advisor to the People’s Bank of China, wrote last week that the central government may need to further increase debt issuance this year.
Monday’s (June 24th) data also showed continued weakness in the property market. Local government land sale revenue in May amounted to 227.4 billion yuan, lower than April’s 238.9 billion yuan, hitting a new low since May 2016.
(This article referenced relevant reports from Bloomberg and Reuters.)