What does China's ‘proactive’ fiscal policy propose and what is it for?

23, Jul - BLOG

In the absence of detailed details of the decisions made at the Third Plenum of the Communist Party of China (CPC), Han Wenxiu, deputy director of the party's economic and financial affairs, announced that they will implement ‘proactive’ fiscal reform to ‘achieve better results.’ Among the fiscal measures that Xi Jinping's administration plans to take is the possible sharing of tax burdens between local and central governments.

This is important because many provinces and municipalities lack the means to stimulate economic growth due to the deep real estate crisis. The key to this measure is that while most local governments have the authority to provide much of the public services, they lack the ability to raise the funds to pay for them through taxation, forcing them to resort to borrowing methods.

This system has led to the accumulation of huge amounts of hidden debts by second and third tier administrations. Recent estimates put these liabilities at between 70 and 75 trillion yuan (about 9.5 trillion euros). They are also experiencing difficulties in paying the salaries of civil servants. All this is due to the severe real estate crisis that has hit the country, which is the main source of income for regions and municipalities thanks to the sale of land for property construction.

Beijing is expanding fiscal funds

In this regard, Han Wenxiu explained that Beijing needs to speed up the issuance of special bonds so that local governments can continue to function. ‘The government needs to tap into fiscal funds to stimulate market growth and structural adjustment.’ This statement will be welcomed by investors who are waiting for stronger stimulus policies to help the country in this property crisis.

‘We need to improve the fiscal relationship between central and local government,’ the spokesman said. This will include increasing fiscal resources for lower-level bodies, which will be able to expand their tax collection systems, while at the same time increasing government spending covered by Beijing. The ‘proactive’ tax reform mentioned by Han also includes considering new tax rules for sectors such as e-commerce and others.
 
‘Studies will be conducted to make China's tax system compatible with new business models,’ he added. The whole real estate situation is creating a deep economic crisis that is slowing household consumption, something Han himself acknowledges. ‘The property sector and its upstream and downstream sectors are shrinking everywhere, steadily lowering social expectations and overall demand,’ said Ni Wen, chief macroeconomic analyst at Hwabao Trust.

Inventory management

For some time now, the Chinese government has been cracking down on the deepening property crisis gripping the country. From encouraging private purchases to allocating 300 billion yuan (around 40  euro billion) in loans to local organisations to buy some of the 60 million empty flats currently on the books. In this new phase, officials agreed after the CPC meeting that it was ‘necessary’ to manage existing stock and develop new policies to meet demand for quality housing. ‘While we have seen some positive developments in the property sector, we need to move forward in both managing existing stock and implementing new policies,’ an official told a press conference on Friday.

Encouraging the private economy and investment

This week's plenary session also discussed measures to stimulate the private economy as well as incentives to boost productivity in the manufacturing sector. ‘The system should promote capital investment and incentivise private investment by forming a market mechanism to stimulate endogenous investment growth,’ representatives said. Among the measures to be taken, according to the state-run Xinhua news agency, are optimising systems for property rights protection, information disclosure, market access and credit supervision. ‘By promoting high-level openness, China will expand unilateral openness to less developed countries and open its markets for goods, services, capital and labour to the rest of the world in an orderly manner,’ Han said.