Non-rating Action Commentary: Are pandemic disruptions in China bringing woes to local governments’ fiscal revenue?


23 May 2022

    The coronavirus pandemic is currently affecting China’s economy, with bigger gaps emerging among provincial regions’ economic development.
    China’s gross domestic product (GDP) reached RMB27 trillion in the first quarter of 2022. The number represented 4.8% year-on-year growth, which was equivalent to a 0.8 percentage-point increase versus that of the fourth quarter of 2021, demonstrating a tepid economic recovery. The GDP growth of 23 provincial-level regions fared better than the national average in the first quarter, with Xinjiang ranked the first with 7% year-on-year GDP growth. Besides, provinces such as Jiangxi, Fujian and Hubei outstripped their peers with their GDP growth surpassing 6% in the first quarter. On the flip side, Jilin was the only provincial region reporting an economic contraction in the country in the first quarter, with its GDP contracting by 7.9% year on year, dampened by more severe clusters of coronavirus outbreak. In addition, the economic growth of Shanghai, Guangdong, Liaoning and Tianjin was relatively slow due to the spread of the pandemic. Despite the fact that Guangdong is the largest province by GDP in China, it registered a GDP of RMB2.95 trillion with a growth of 3.3% in the first quarter, outperforming Jiangsu whose provincial GDP ranked the second largest in the country by merely RMB60 billion, as the latter reported its GDP at RMB2.89 trillion in the same period.
    The ‘dynamic zero-infection’ policy has led to relatively draconian approaches in regions which are struggling with the pandemic outbreak, including extensive nucleic acid amplification tests, restrictions on social gathering and travel, shutting down of businesses and so on. Therefore, a regional pandemic can substantially frustrate the production, business operations and consumption in the affected areas, which in turn dampens the local economy. We believe the economic data of the first quarter has not fully reflected the pandemic’s impact on the local economy. For instance, the rigorous control measures in Shanghai have not been introduced until late March. In fact, regional economies took a heavier blow by the pandemic in April given that China’s total retail sales dropped by 11.1% and fixed asset investment decreased 0.82% versus the same period of 2021.
    In the first four months ended April 2022, a total of 29 provincial regions in China reported coronavirus confirmed cases in their jurisdictions. Among these, the cumulative confirmed cases of Jilin and Shanghai surpassed 10,000, while Guangdong, Shandong and Fujian among seven other provinces reported more than 1,000 cumulative confirmed cases. At present, the local coronavirus pandemic continues to evolve in China with uncertainties ahead, hence many local governments are concurrently facing challenges in executing the prevention and control of the pandemic. Those regions with worse local pandemic situations are projected to experience greater pressure on their economic growth this year, in our view.
    In the short term, the tax refund initiative is curbing local governments’ fiscal revenue, but long-term stability is expected.

    China’s national general public budgetary revenue for the first four months of 2022 was RMB7.4 trillion, a decrease of 4.8% year on year and an increase of 5% year on year after excluding the impact of value-added tax credit refunds. As to the local governments, their general public budgetary revenue generally increased in the first quarter (most provinces have not yet released April data), but the discrepancies among the growth rates widened. Benefited from the rising commodities prices, resource-producing economies such as Inner Mongolia, Shanxi and Xinjiang saw their fiscal revenue surging in the first quarter with year-on-year upticks of 64%, 51% and 46% in their general public budgetary revenue, respectively. On the other hand, some wealthy provinces, such as Guangdong, Zhejiang and Jiangsu, registered slower increases in their general public budgetary revenue than the nation in the first quarter, largely owing to the sluggish consumption growth. Jilin, Tianjin and Guangxi faced greater challenges in fighting against the pandemic in the first quarter, hence registered negative fiscal revenue growth.

    In April, however, many regions saw material declines in their fiscal revenues, such as the cities of Shenzhen, Suzhou and Nanjing, whose general public budgetary revenues plummeted by more than 40% year on year, raising sweeping concerns over the fiscal strength of Chinese local governments. However, apart from the economic slowdown and the pandemic, we believe the major cause for the slump in local governments’ fiscal revenue in April was the implementation of the tax refund policy. The Ministry of Finance previously announced an initiative to increase the amount of value-added tax refunds to RMB1.5 trillion this year. Since its implementation in April, a total amount of RMB913.8 billion has been refunded to taxpayers as of 10 May. In our opinion, the tax rebate policy has exerted temporary pressure on local governments’ fiscal revenue, which could be intensively reflected in local governments’ fiscal data from April and the next few months. Nevertheless, the essence of the tax refund policy is not to waive the tax for enterprises, but to return the future deductible tax to enterprises in advance, which is set to improve their current cash flow. In the long term, local governments’ fiscal revenue is likely to resume steady growth, as the pandemic subsides, China’s economy returns to stability, and central government fiscal grants are increased. However, the regions wrecked by intensified and prolonged coronavirus pandemic outbreaks should be watched regarding the impact on their local governments’ fiscal revenue and the concomitant measures.

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