Omicron and widespread lockdowns blamed for sharp contraction in government revenue

The Chinese government is now in dire straights as it faces a massive budget gap of about six trillion yuan (US$895.52 billion) with a growing shortfall in revenues.

Analysts are predicting that the government will have to increase debt to plug the gap, given the growing pressure for economic growth that would require more support from debt.

Nomura Research Institute, the largest economic research and consulting firm in Japan, estimates a funding gap of about 6 trillion yuan.

This is estimated at roughly 2.5 trillion yuan in decreased revenue due to tax refunds and weaker economic production and another 3.5 trillion yuan of lost land sales revenue. The analysts have listed several measures to plug the gap from using fiscal deposits to increasing borrowing.

“Much of the incoming ‘stimulus measures’, be it special government bonds or incremental lending by policy banks, will be merely used to fill this funding gap,” explained Ting Lu, chief China economist at Nomura, and his team in a report last week.

The latest wave of Omicron and the widespread lockdowns in place since mid-March have been blamed for the sharp contraction in government revenue, including land sales revenue.

Economic data for April showed weakening growth as COVID controls took a toll.

Difficulties now are greater than in 2020

Premier Li Keqiang said, during a rare nationwide meeting last week, that in some respects, the difficulties now are greater than in 2020 at the start of the pandemic. Even before the latest COVID outbreak, land sales, a significant source of local government revenue plunged following Beijing’s crackdown on real estate developers’ high reliance on debt.

Local governments are also responsible for implementing tax cuts and refunds that Beijing has announced to support growth.

Excluding tax cuts and refunds, the Chinese Ministry of Finance said local fiscal revenue grew by 5.4 per cent during the first four months of the year from a year ago.

Eight of China’s 31 province-level regions saw a drop in fiscal revenue during that time, the ministry said, without naming them.

CNBC reports that incomplete data for the period from Wind Information showed the regions of Qinghai, Shandong, Liaoning, Hebei, Guizhou, Hubei, Hunan and Tianjin posted year-on-year declines in fiscal revenue for the first four months of the year.

Tianjin was the worst with a 27 per cent decline.

In 2021, Tibet was the only province-level region to see a decline in fiscal revenue, according to Wind.

Since March, mainland China has sought to control its worst COVID outbreak in two years with stay-home orders and travel restrictions in many parts of the country, notably Shanghai and the surrounding region.

Although financial data isn’t readily available for many Chinese cities, the southern tech hub of Shenzhen released figures showing a 44 per cent year-on-year drop in fiscal revenue in April to 25.53 billion yuan. That followed a seven per cent year-on-year decline in March to 22.95 billion yuan.

Beijing in March already announced an increase in transfer of funds from the central to local governments. When asked by the media in May whether that would be expanded, the Ministry of Finance noted some funding for next year would be transferred ahead of time to help local governments with tax refunds and cuts this year.

In late April, Chinese President Xi Jinping called for a nationwide push to develop infrastructure ranging from waterways to cloud computing infrastructure. It was not clear at what scale or timeframe the projects would be constructed.