In a world where the West continues tightening monetary policy through interest rate hikes, we find ourselves in a unique position as we attempt to maintain an independent monetary framework while simultaneously increasing liquidityThis approach has been accompanied by various fiscal policies aimed at halting the macroeconomic decline that commenced in the last quarter of the previous yearDespite these efforts, the anticipated results have eluded usEconomic indicators across multiple sectors—ranging from consumer spending to real estate, and from corporate profits to tax revenues—are on a downward trajectory.

The statistics on fiscal revenues further substantiate the weak economic performance observed in the first half of the yearFrom January to May, the country's fiscal revenue stood at approximately 10.87 trillion yuan, reflecting a staggering year-on-year decline of 13.9%. The fiscal deficit reached an alarming figure of 2.97 trillion yuan, resulting in a deficit ratio of 27.3%, which far surpasses the 21.6% recorded in 2021. Meanwhile, local government debt has surged dramatically, with the actual debt balance nearing 50 trillion yuan, placing an annual burden of 12.4% of fiscal revenue solely on interest payments.

A detailed analysis of the fiscal revenues and expenditures during the January-May period reveals six critical aspects that merit attention and vigilance.

First, the decline in fiscal revenue is intrinsically linked to the economic cycle, with the pandemic serving merely as an accelerant for this downturn

Many observers tend to attribute the economic hardships of the first half of the year to our ongoing pandemic prevention measuresHowever, such a viewpoint is an oversimplificationBy examining GDP growth rates, we can observe that the economy began to slow down as early as the fourth quarter of the previous yearAs a consequence, fiscal revenues, which are intrinsically tied to economic activities, are consequently affected by this downward economic cycle.

The January-May fiscal revenue comparison reveals a stark reality: overall fiscal receipts began to decrease in March, with year-on-year declines of 4.1%, and an escalation of that decline in April and May, where it was recorded at 31.6% and 37.1%, respectivelyNotably, local fiscal revenues have been in a downward spiral since January, with losses of 4.1% (January-February), 3.2%, 39%, and 27.8% for the corresponding months.

Second, a significant reduction in value-added tax (VAT), revenue from the transfer of state-owned land rights, and a sharp rise in export tax rebates have been prime contributors to the overall fall in fiscal revenue

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Data from specific income categories within the fiscal reports reinforces this notionFor instance, VAT revenue, which is considerable, only generated 1.66 trillion yuan from January to May after adjustments, marking a decline of 43.4% year-on-yearWith the real estate market in a persistent slump, revenue from state-owned land use rights amounted to just 1.86 trillion yuan, down 28.7% year-on-yearFurthermore, export tax rebates surged to 851.8 billion yuan, an increase of 25% from the previous year, compounding the challenges faced by fiscal revenue.

During the January-May period, fiscal components such as non-tax revenues, corporate income tax, individual income tax, domestic consumption taxes, and import VAT grew modestlyFor example, non-tax revenues of 1.43 trillion yuan saw a year-on-year rise of 13.1%, while individual income tax increased by 8.3%. It's noteworthy that the collection base for income taxes largely stems from last year's figures, while consumption taxes primarily target luxury goods including alcohol, cosmetics, and high-end consumer products.

Third, the contribution of imports and exports to fiscal revenue has decreased by one-third

Despite a decline in growth rates for imports and exports, the figures remain relatively impressive when compared to other sectorsFrom January to May, exports amounted to 8.95 trillion yuan and imports reached 7.08 trillion yuan, corresponding to increases of 15.5% and 2.7% year-on-year, respectivelyThe total trade volume saw a 9.7% rise annually.

However, the heightened export tax rebate policies have significantly impacted the contribution of trade on fiscal revenuesWhile customs duties reached 120.8 billion yuan and import VAT and consumption tax totaled 853.8 billion yuan, export rebates offset these figures, culminating in a net fiscal contribution of only 122.8 billion yuan from trade—an alarming 28.9% declineThis contribution ratio plummeted from 1.18% the previous year to a mere 0.77% this year, indicating a steep decrease.

Since the inception of our export tax rebate policies, there have been frequent reports of large-scale tax fraud involving fictitious export VAT invoices aimed at defrauding substantial amounts from government rebates

The current data indicates a rebate rate on export amounts that has ballooned to 7.7%, an increase of 0.8 percentage points from 2021—a figure that raises considerable concern.

Fourth, despite the notable slump in fiscal revenues, public expenditures continue to grow rigidly, leading to a dramatic widening of the fiscal deficitWithin the same January-May window, total fiscal revenue was recorded at 10.87 trillion yuan—a stark drop of 13.9% year-on-yearTax revenues alone accounted for 7.25 trillion yuan, reflecting a decline of 13.6%, whereas non-tax revenues increased by 13.1% to reach 1.43 trillion yuanYet, fiscal expenditures surged to 13.84 trillion yuan, showcasing a year-on-year growth of 12.4%, outstripping revenue growth by over 26 percentage points— a concerning development indeed.

The rigid nature of government spending, influenced by factors such as operational costs and epidemic prevention expenditures, has resulted in a deficit of 2.97 trillion yuan for the first five months—significantly diverging from last year’s surplus—representing 67.8% of the total deficit for 2021, which was pegged at 4.38 trillion yuan

The deficit rate stood at 27.3%, considerably higher than the 21.6% rate recorded in 2021, suggesting mounting pressures on fiscal sustainability.

Fifth, there is a glaring increase in local government debt, with the actual debt balance nearing 50 trillion yuan and necessitating 12.4% of annual fiscal revenue just for interest paymentsAs of June 3, the Ministry of Finance reported a significant rise in local bond issues aimed at funding long-term projects such as transportation and water conservancy, reaching a staggering 31.997 trillion yuan in the first five months—a dramatic year-on-year increase of 65.1%. The rate at which new bond issuance has been ramped up indicates the severity of the situation, as we have completed 57.1% of the annual new debt limit within a mere five monthsThis emphasizes an urgent need for scrutiny as local debts surged to 35.98 trillion yuan, a 32.3% year-on-year increase.

By the end of May, fiscal budgets allocated 4.413 trillion yuan in interest payments, marking a 10.1% increase compared to last year, which accounted for 4.1% of fiscal revenues.

Additionally, as local government financing vehicle (LGFV) debts mount to 13.64 trillion yuan—officially classified under enterprises but effectively local government liabilities—the potential implications could reshape our fiscal strategies

This mountain of debt has not typically been included in government fiscal expenditures, highlighting the need for a comprehensive recalibration of fiscal policy.

The cumulative local government debt can tentatively be estimated at around 49.62 trillion yuan, equating to 37 months of local fiscal revenuesWith an interest payment rate of 4%, this translates to a staggering annual cost of around 1.984 trillion yuan—representing 12.4% of the projected annual fiscal revenues for 2022 based on January to May averagesThis precarious situation inches us closer to what can only be described as a critical threshold for indebtedness.

Lastly, the risks associated with city investment debts are intensifying, necessitating a keen awareness of how such risks might impact local public financesCity investment companies, which are essential for driving economic growth through infrastructure investment, are emerging as primary players in the municipal bond market

As we shift into lower economic growth territory, the vulnerabilities tied to these investment vehicles are becoming increasingly evidentFollowing the release of financial reports for 2021, ratings for city investment entities have been adjusted downward with alarming frequency.

Recent reports indicate that 11 city investment firms have had their ratings downgraded, exposing many to overdue debts or non-performing loans, alongside being blacklisted for dishonest practicesJust days later, additional downgrades in ratings were reported, highlighting the growing struggles faced by these entities amidst declining revenues.

As a case in point, Wenshan Urban Construction Investment has seen its credit status maintained as AA-, but the outlook has shifted to negative due to objectives surrounding unpaid debts and insufficient asset liquidity causing severe short-term repayment pressures