The surging fiscal transfer from the central government is expected to bolster the budgetary revenue of local governments this year, particularly those with weaker fiscal self-sufficiency.
The central government has slated an incremental RMB1.5 trillion fiscal transfers to local governments in 2022, an increase of 19% compared to the fiscal implementation in 2021. This is viewed as an unprecedented growth over the past decade, when the average annual growth of the central government’s fiscal transfers was at 7.6%. The central government embarks on increasing the size of transfer payments, favoring regions with difficulties, underdeveloped areas, and regions with more tax and fee reductions. This is a strategic and rational approach, in our view, given that the economic slowdown, persistent tax cuts and the bleak land market are exacerbating the fiscal divergences among regions with different economic development stages. The significant enhancement of fiscal support from the central government should partially diminish the budgetary revenue gap between the wealthy and the poor regions, and most importantly, lift certain regions out of fiscal quagmire. We believe that this measure will benefit local governments with weaker budgetary self-sufficiency but a higher proportion of fiscal transfers in their budgetary revenue, increasing their reliance on the central government. For instance, over 50% of the budgetary revenues of the provinces of Qinghai, Gansu and Yunnan were derived from the central governments’ fiscal support in 2021. The steadfast growth of the fiscal transfers has been the prime driver in their fiscal revenue over the past few years, so the furtherance of the fiscal support will boost their fiscal strength and alleviate their fiscal pressure, thereby improving their creditworthiness.
The central government is walking a fine line between setting forth the proactive fiscal expansion and increasing the local governments’ leverage.
The local governments’ government fund revenues are budgeted flat in 2022, while the expenditures are budgeted to rise 19% year on year, generally in line with our projection. The gap between the revenue and expenditure is expected to be covered by the incremental special bond with a limit of RMB3.65 trillion. The ceiling is established at the same level as in 2021, showing that, while the central government is reinforcing its proactive fiscal measures, its willingness to rein in local governments’ debt levels is strong, with undue debt raises not taken under consideration. However, because the real estate market has not yet recovered, many local governments may struggle to achieve flat land sales growth this year. Further loosening of property market restrictions may be necessary to rejuvenate the enthusiasm for land purchases. As the developers become more discreet and concentrate their land acquisition efforts on wealthier regions, the divergences in land sales between regions are widening. Nonetheless, the significant and prioritized increase in the central government fiscal transfers is expected to balance the regional fiscal diversities and thus effectively sustain the country’s fiscal expansion.
Instead of ramping up debts, the central government has higher inclination to rely on the stated-owned assets and enterprises to meet its fiscal needs.
China’s central bank announced on 8 March to transfer a total of more than RMB1 trillion in profit to the central government, substantially augmenting the central government’s fiscal revenue base and facilitating its increase in transfer payments to local governments. The initiative is echoed with the national budget scheme for 2022, which stipulates that certain state-owned financial institutions and specialized institutions will pay RMB1.65 trillion of their profit to the central government in 2022. This indicates that the central government is becoming more active in utilizing its gargantuan state-owned enterprises and assets to fuel its fiscal revenue without incurring excessive debt. The initiative also shows the central government’s capability to manage its deficit and debt levels, with its abundant revenue sources and realizable assets, while implementing a proactive fiscal strategy and, at the same time, revealing the tools available to the central government to fiscally support local governments.
Jameson Zuo, FRM
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