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China’s budget deficit widens 600% as pandemic cuts revenue

July 14, 2022 Updated Thu., July 14, 2022 at 10 a.m.

Bloomberg

China’s broad budget deficit in the first six months of the year widened to a record as government spending climbed and falling land sales and tax breaks cut income.

The budget deficits for all levels of government was a combined 5.1 trillion yuan ($758 billion), according to Bloomberg calculations based on data from the Ministry of Finance released Thursday.

That was the highest ever for the first half of any year and compares with a shortfall of just 718 billion yuan at the same point in 2021 and a gap of 3.4 trillion yuan in 2020.

China’s finances have been squeezed this year as its worst COVID-19 wave in more than two years and restrictions imposed to contain the outbreaks curbed economic growth and tax income, while putting extra burdens on local governments to spend more to pay for virus testing and controls.

Revenue has also been impacted by a tax relief plan to shore up the economy and a struggling real estate market, which caused land sales to plummet.

The finance ministry will keep a close eye on local government finances and detect and solve problems in a timely manner, Song Qichao, an official with the ministry’s budget department, said at a briefing Thursday.

“Preemptive measures to curb spending will be taken and contingency plans will be made for some counties whose fiscal situation is in a tight balance, so that we maintain the bottom-line of preventing systemic risks,” he said.

The government took in 13.3 trillion yuan in income in January to June, when combining the general public and government funds.

General public revenue fell 10.2% from a year earlier, but would have risen 3.3% had it not been for the tax rebates, the ministry said.

“Fiscal income is expected to gradually rebound as the economy will likely continue to recover in the second half of the year” with government stimulus taking effect, Xue Xiaoqian, an official with the MOF’s treasury payment center, said at the same press conference.

The government had planned 1.64 trillion yuan worth of additional tax refunds to companies this year, but has actually returned 1.85 trillion yuan in the first six months, 2.9 times the size seen in the whole year of 2021, said Wei Yan, another MOF official.

The impact of the program on government income will likely taper off in coming months.

Government spending continued to rise.

Total spending was 18.4 trillion yuan, while general fiscal expenditure, which includes things like education, healthcare, defense and scientific research, was up 5.9% to 12.9 trillion yuan.

Revenue from the sale of land dropped 31.4% on year in the first six months of 2022 to 2.4 trillion yuan.

Beijing has urged local governments to accelerate the sale of special bond this year to fund infrastructure investment, which is a key driver of economic growth this year as consumption is weak due to covid outbreaks and the housing market is contracting.

A total of 3.41 trillion yuan out of this year’s 3.65 trillion yuan of new special local bond quota was sold by the end of June, Song said.

More than 23,800 projects were supported by this money, with more than half of them newly-started programs, he said.

About 240 billion yuan of the bond proceeds were used as equity capital for projects in the first half of the year, while more than 530 billion yuan raised through “market-based financing” was obtained in supplementary funding, he added.

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