China’s Provinces Show Evidence of Financial Pressure and the Economy’s Imbalances

Commentary

Some 28 provinces and separate jurisdictions increasingly have had to turn to Beijing for help closing budget gaps, according to China’s Ministry of Finance.

It is not unusual for Beijing to have to chip in. It gets the lion’s share of the country’s tax revenues. But the growing need to turn to Beijing nonetheless points to the economy’s imbalances and other problems.

Some transfers from Beijing have occurred since the country’s tax-sharing reforms were implemented in the 1990s. Beijing gets all income tax revenues from both individuals and companies, all securities trading levies, and all customs duties.

Provinces and like entities must depend almost entirely on deed and land appreciation taxes. Even during the boom years of property development, some provinces needed help. Few had what the Chinese call budgetary “self-sufficiency ratios” at 100 percent.

Outlining the most recent data from this year’s first quarter, the deputy director general of the finance ministry’s budget department, Tang Zaifu, downplayed the troubling direction of provincial finances. The figures, however, make clear that self-sufficiency has deteriorated and dependency has grown.

Now, Beijing must cover half the budget needs of the 22 provinces under its control and an additional five separate jurisdictions. (Beijing claims 23 provinces, but one, Taiwan, manages its own budget and obviously is not subject to the People’s Republic of China’s governance.)

The needs of this large number of jurisdictions vary greatly. It is significant, however, that even Shanghai—one of the country’s richest areas—failed to meet its own budget needs during this year’s opening quarter—this for the first time since the pandemic.

Some areas have done comparatively well. Zhejiang, for instance, managed a self-sufficiency ratio of just over 96 percent. Other rich areas, such as Shandong and Guangdong provinces, showed self-sufficiency ratios exceeding 70 percent.

Other areas did less well, a lot less well. Filling all the budget gaps will cost Beijing some 10.5 trillion yuan, more than a third of the government’s entire budget.

Though arcane in many respects, these budget needs and burdens offer yet other perspectives on the imbalances in China’s economy and finances.

The first point that becomes clear is how much China’s economic reality has changed since the still-prevailing budget reform rules of the 1990s. Those revenue-sharing arrangements, implicitly dependent on a booming property development sector, are simply no longer viable. The still-ongoing property crisis has thoroughly reordered the economy.

These budget figures also point, albeit obliquely, to how narrowly focused China’s economy has become. The only reliable growth lies in the mostly high-technology sectors favored by Beijing’s “Made in China 2025” program.

Broad-based development has received short shrift, including the Chinese consumer and investments in other, mostly privately owned sectors, making China’s economy narrower and more export-dependent than ever.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.