BEIJING: A fine of 66,000 yuan (US$9,525) for selling substandard celery and a 300,000 yuan (US$43,300) fine for raising the price of potatoes may seem superfluous.

However, as local governments in China look for ways to raise much-needed funds, unreasonably heavy fines have risen, revealing the tip of the fiscal iceberg in China.

Local governments, already battered by a coronavirus outbreak that never seems to end, are fighting to keep their fiscal balance sheets clean as a bleak future for China's economy faces several headwinds. have to do. In the first half of the year, revenue fell short of expenditure in each of mainland China's 31 provinces, municipalities and autonomous regions.

Authorities in China are struggling with lower revenues as a result of a property sector slowdown and tax exemptions they will have to pay as part of their efforts to aid businesses hit by the virus as the country's economic growth lags.

Additionally, they are struggling under the weight of rising costs, primarily due to coronavirus-related expenses, such as the cost of mass testing and social constraints.

According to the finance ministry, the local economic slowdown led to a decline in corporate tax revenue, which fell 13.8% to 10.27 trillion yuan (US$1.48 trillion) in the first seven months of the year from a year earlier.

According to economist Xu Tianchen of The Economist Intelligence Unit, "massive tax cuts and exemptions aimed at supporting businesses this year came at the expense of local public finances, with the value-added tax, a significant source of revenue, from 40 More down %." (EIU).

During the first seven months, land sales revenue, a key local government financing tool, which typically accounts for a third to half of revenue, declined a record 31.7%.

"Local governments cannot rely on land sales to fill the fiscal gap due to the current slowdown in the real estate market," Xu said.
China's deficit of 5.3 trillion yuan in the first seven months of the year was the result of lower revenues and increased spending, with costs linked to the coronavirus being a significant contributor.

Testing 70% of the population every two days could cost US$370 billion, or 2.2% of China's 2017 economic output, according to Goldman Sachs' May estimates.

According to an estimate by Soocho Securities, the cost of routine coronavirus testing in all first and second tier cities could reach 1.7 trillion yuan annually, or 8.7% of public spending, or 1.5% of China's GDP in 2021.

Although most parts of the country still receive free virus tests, some provinces, including Sichuan, Shaanxi and Yunnan, have started charging for them.

After GDP growth of just 0.4% in the second quarter, China is dangerously close to entering an economic recession.
Global investment banks have slashed their growth projections for China's economy this year to between 2.6 and 3.3%, and Beijing has already admitted it cannot meet its annual growth target of "about 5.5%". Is.

Furthermore, while China is increasing its infrastructure spending, it is relying on local governments in the second half of the year to fuel economic growth.

According to finance ministry data, spending on infrastructure projects grew by 7.4% in the first seven months of the year compared to the same period last year, while spending on water conservation projects grew by 71.4 per cent.

Beijing has little to offer as central government transfer quotas for local governments for this year have been almost consumed, as well as quotas for special purpose bonds to finance infrastructure projects.

At a meeting last month, Premier Li Keqiang called on local governments to "tighten their belts, use existing resources more effectively, maintain a balance between revenue and expenditure, and guarantee fiscal spending to ensure people's livelihoods." requested."

According to Susan Chu, senior director at S&P Global Ratings, slowing revenue growth is likely to lead to more front-loaded spending initiatives from local governments to support the economy.

In contrast to 11% in 2021 and 16% in 2020, we estimate the fiscal deficit on total revenue for local governments in China to be 20 to 25% for 2022. In the long run, we anticipate that the need to mitigate fiscal risks will take precedence over the need to enhance investment-driven growth.

 "Low liquidity buffers and low fiscal resources point to spending cuts, and will likely have secondary effects on the local economy," the authors write. “We believe that the central government is unlikely to significantly increase quotas for new bond issuances by local governments, forcing them to liquidate internal cash or liquid assets.”

A growing number of cities have been counting on fines to rise since last year. Public data gathered by the Southern Weekly newspaper in Guangzhou show that revenue from fines and money seized from illegal sources, such as pyramid schemes, increased in 80 out of 111 cities last year, or 72%.

In 15 cities, the revenue from fines and seizures more than doubled, with Leshan in the Sichuan province seeing a 155% increase. Jiangxi province's capital city of Nanchang saw a 151 percent increase in revenue.

Local authorities in Yulin, Shaanxi province, fined a grocery store 66,000 yuan ($9,525) last month for selling 2.5 kg (5.5 lbs) of subpar celery for 20 yuan ($2.9).

Yulin's debt ratio increased to 123% last year as a result of its expenditures of 80 billion yuan and 58.7 billion yuan in revenue.

Public records and state and local media reports state that a potato vendor in Daqing, Heilongjiang's northernmost province, was fined 300,000 yuan (US$43,300) for "jacking up" his prices by more than 66 percent after charging 4 yuan per kilogramme.

The total fiscal expenditure in Daqing in 2021 was almost twice as high as the total fiscal revenue, and the local government debt ratio was 266 percent.

According to Xu from The EIU, local governments continue to make excessive outlays while having little available to them, which led to the excessive fines.

The fiscal problem will persist in the coming months, if not years, he predicted, particularly in smaller cities and counties with already subpar public finances and net population declines.

This indicates that local government will exert every effort to reduce spending and turn to unusual revenue sources like fines.

More checkpoints have been set up across the nation to fine drivers and passengers for not fastening their seat belts and other related violations, and police in many cities have increased the number of tickets they issue for moving violations.

Truck drivers in Chengwu county, Heze city, southwest Shandong, can purchase a "monthly pass" for 1,000 or 2,000 yuan to avoid further fines for any subsequent traffic violations, according to a report from the China Youth Daily newspaper.

Fiscal revenue for Chengwu county in 2021 was 1.3 billion yuan, while expenditures totaled 4.3 billion yuan.

According to Xu, if the desperate measures persist, there could be a decline in the quality of public services, intermittent protests, and eventually defaults on the debt of the local government.

From a macroeconomic standpoint, the ongoing fiscal strain may erode the income of sector employees because China's public sector as a whole employs a lot of people, which will result in even less consumer spending, according to Xu.

“A short-term imperative would be to stem the spread of the ongoing crisis. China will need to restore its revenue stream, revive its real estate market, and have the central government assist some of the struggling localities in order to achieve this. 

Fiscal consolidation will be the overarching theme. For instance, it is likely that governments and public facilities in smaller administrative units will merge to reduce costs. Government mandates could gradually be reduced to concentrate on fundamental public services and turn away from large-scale investment initiatives.

Some local governments are experiencing financial strain and have already stopped providing public transportation, including buses, and delayed paying employees' salaries.

Two-thirds of the county's workforce in Shanxi province's Hequ has been effectively laid off, dispelling the myth of the so-called iron rice bowl from a profession that had previously been associated with job security.

According to a Caixin report, several bus lines in Boluo county in Guangdong province have also been reduced in number or suspended as a result of financial strain. Dancheng, a county with a population of 1.37 million people in central Henan province, also suspended bus services last month.

According to Zhang Zhiwei, chief economist at Pinpoint Asset Management, "in the future, the local government might sell more assets to deal with this kind of fiscal pressure."

Local governments have assets, state-owned companies, and cash-generating businesses, like the highway, for example. Potentially, those assets could be sold to ease the financial strain. But in the end, the local economy's recovery must provide the answer; otherwise, the current economic and fiscal problem can only be solved by assisting the economy in reaching its full potential.

"Therefore, some modification of the zero-Covid policy is required. Hopefully, after the leadership transition later this year and at the start of next year, the zero-Covid policy will eventually be loosened, which will aid in the recovery of the economy."

According to Zhang, the cost of additional spending to contain the coronavirus could also jeopardise the fiscal viability of local governments over the long term, putting pressure on other expenditures and the health of the economy.

Despite the need for additional data for analysis, he continued, it is important to consider the long-term impact that coronavirus-related costs have on pension andhealthcare.

Governments were urged to tighten their belts by paying close attention to the budget's implementation, giving priority to necessities, and making sure that important expenses, like teachers' salaries and pensions, are paid on time in a report from the Ministry of Finance that was released last month on the implementation of fiscal policies in the first half of the year.

Regarding the fines imposed by the local authorities, a local media report from late last month stated that the potato vendor in Daqing in the northern province of Heilongjiang who was assessed a 300,000 yuan penalty intended to challenge the fine.

According to the report, he paid 60,000 yuan a year to rent the storefront and sold more than 2,000 kilogrammes of potatoes for 4 yuan each.

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