Data released by the Chinese Ministry of Finance show that in the first half of the year, the national general public budget revenue was RMB 10522.1 billion, an increase of 3.3% after deducting factors like tax rebates. This is an increase of 0.4 percentage points from January to May. Being a 10.2% drop based on natural caliber, this narrowed sharply compares with the 32.5% drop from January-May. In addition, the national general public budget revenue stabilized and rebounded in June. Compared with the same period of the previous year, after deducting the factors of tax rebates, the national general public budget revenue increased by 5.3% in June, and the growth rate changed from negative to positive. According to the natural caliber of not deducting the factors of tax rebates, it decreased by 10.5%, and the decline rate was significantly narrowed.

Such figures reflect that after the COVID-19 outbreaks are brought under control, the downward trend of fiscal revenue in China has begun to reverse while the economy is recovering. The Ministry of Finance also has optimistic expectations for the fiscal situation in the second half of the year, and believes that on this basis, fiscal revenue is expected to gradually pick up.

For researchers at ANBOUND, the improvement in fiscal revenue is indeed good news for China’s economic situation in the second half of the year. Although there is a recovery in the economy, under the circumstance of expanding policy demands in the second half of the year, the fiscal operation will still face greater pressure, hence the relevant authorities should not be overly optimistic. Indeed, the overall financial operation still faces sustainable challenges.

On the positive side, with the pandemic being brought under control, the Chinese economy is showing a positive trend, which will inevitably increase the overall fiscal revenue, mainly tax revenue. At the same time, under the circumstance that this year's tax and fee reduction policies have been strengthened, a tax rebate of about RMB 1.85 trillion was completed in the first half of the year. Compared with the overall estimated scale of RMB 2.64 trillion, the peak of the remaining tax rebates has passed. In the second half of the year, tax rebates will be weakened and fiscal operations will return to normal. This will bring positive effects on the improvement of fiscal revenue in the second half of the year.

However, in the first half of the year when tax revenue fell sharply by 14.8% (based on natural caliber), the national non-tax revenue increased by 18%, which actually played a supporting role in easing the decline in general budget revenue. Looking at the central and local levels, the central non-tax revenue increased by 53.2%, and the rise was mainly due to the increase in the oil special income fund driven by the rise in crude oil prices, as well as the resumption of the collection of banking and insurance industry supervision fees according to regulations. High central non-tax revenue increased by 45.4 percentage points. Local non-tax revenue increased by 15.5%, of which, the paid use of state-owned resources (assets) increased by 29.6%, and the state-owned capital operation revenue increased by 49.6%. The two combined increased the growth rate of local non-tax revenue by 12 percentage points, chiefly because of the local multi-channel revitalization of idle assets and the increase in the income related to the mineral resource. In addition, local administrative fees and charges increased by 0.4%. Financial resource-wise, in the first half of the year, in order to stabilize fiscal revenue, the central and local governments continued to tap potentials and rely on non-recurring revenue to maintain it. Under the continued financial pressure, it may be difficult for non-recurring revenue in the second half of the year to maintain a high growth rate.

Meanwhile, from the perspective of the regional distribution of fiscal revenue, when fiscal revenue declined in the first half of the year, various regions also showed a trend of differentiation. In terms of different regions, in the first half of the year, after deducting the tax rebate factor, the local general public budget revenue increased by 4.7%, and the revenue growth of the eastern, central, western and northeastern regions was -1%, 13.7%, 16.5% and -3.5% respectively. This means that some regions may experience fiscal pressures far greater than the overall level. In particular, the financial situation at the county level is even worse. In the absence of stable tax sources, the local financial situation is far less optimistic than the overall appearance.

More worryingly, looking at general finance, the revenue of government funds still fell sharply in the first half of the year, which means that local governments may be faced with the accumulation of debt problems and the embarrassing situation of lack of investment funds. According to data from the Ministry of Finance, the budget revenue of government funds in the first half of the year was RMB 2,796.8 billion, down 28.4 percent from the same period last year. The budgeted revenue of local government funds at this level was RMB 2,607 billion, down 29.7% from the same period of the previous year, of which the income from the transfer of state-owned land use rights was RMB 2,362.2 billion, down 31.4% from the same period of the previous year. Such a decline was wider than that of the previous five months. The real estate market continued to decline, and the local "land finance" is still facing a huge gap. At the same time, under the circumstance that the issuance of local special bonds has been completed in the first half of the year, in the second half of the year, the local government not only faced the risk of interruption in promoting effective investment, but it would be even more difficult to maintain the already high local debt. In this regard, local governments may further rely on platforms for financing and increase hidden debts. Additionally, as China’s economy is now in a complex situation, the real estate market continues to maintain downward momentum, and some regional financial risks continue to emerge. The pressure of future risk prevention still requires the fiscal side to have the “surplus” in promoting structural reforms.

On the expenditure side, in the first half of the year when fiscal revenue declined, China’s fiscal expenditure still maintained a relatively stable growth rate. In the first half of the year, the national general public budget expenditure was RMB 12,888.7 billion, an increase of 5.9% over the same period of the previous year. The national government fund budget expenditure was RMB 5,482.6 billion, an increase of 31.5% over the same period of the previous year. In terms of the central and local governments, the budgetary expenditure of the central government funds at this level was RMB 204 billion, up 1.2 times over the same period of the previous year. The budget-related expenditures of the local government funds were RMB 5,278.6 billion, an increase of 29.5% over the same period of the previous year. Among them, expenditures related to income from the transfer of state-owned land use rights were RMB 3,080.6 billion, down 6.4% from the same period of the previous year.

From a local perspective, despite the decline in land-related expenditures, expenditures on COVID-19 control measures, people's livelihood, as well as policies in safeguarding employment and the operation of market entities are all facing increases. Although the Chinese central government has stepped up its efforts, the scale of new transfer payments of RMB 1.2 trillion is only about RMB 800 billion this year, which is still insufficient to make up for the gap in local finance. Some analysts said that in the first half of this year, generalized fiscal expenditure exceeded revenue by about RMB 5 trillion, a new high in recent years. In the first half of last year, this figure was less than RMB 1 trillion (approximately RMB 718.1 billion). This gap in revenue and expenditure was made up by issuing government bonds and transferring funds. If the fiscal policy in the second half of the year continues to increase support for the economy as expected, the intensity of expenditure will be stronger, which will be a great challenge for China in achieving this year's budget deficit.

Final analysis conclusion:

While China’s fiscal revenue and expenditure situation both in June and in the first half of the year showed a positive side and the economic trend have "bottomed out" and began to rebound, the fiscal operation still faces regional and structural problems. In the second half of the year, when the macroeconomic policy becomes more reliant on fiscal support, it would be crucial for the Chinese authorities to consider the challenges of fiscal sustainability.