China's Fiscal Situation and Policy Challenges - Fiscal Risk Considerations

As the economy continues to stagnate, the direction of economic policy is becoming increasingly important. The tax and fiscal system, as well as policy management, are being widely questioned. Local fiscal risks have also increased significantly amid the ongoing turmoil in the real estate market. The continuation of “aggressive fiscal policy” has been announced, and government policies are being implemented, but drastic measures have yet to be implemented, and there are concerns that the central government in particular is taking a cautious stance. Measures are needed from relatively sound central finances. The fact that the 20th Plenary Session of the Central Committee of the Communist Party of China (hereinafter referred to as the 3rd Plenary Session of the 20th CPC), held under these circumstances, put forward measures to restructure local government finances by adjusting inter governmental fiscal relations and strengthening the transfer of some powers to local governments can be appreciated to a certain extent. However, the specific details are not necessarily clear, and there is some uncertainty about how they will be realized. It is essential that the reforms outlined in the Conference’s “Decision” be carried out appropriately and promptly, and future developments will be closely monitored. At the same time, central and local governments continue to fight each other and compete for a share of the fiscal pie, and it is necessary to address issues such as the expansion of financial resources to increase revenue and the thoroughness of tax collection. Public finance challenges are piling up, including the accelerating population decline and aging of society, the expansion of military spending and “Advancing State-owned Sector and Retreating Private Sector” while giving top priority to “national security,” and the inefficient management of economic policies due to policy inconsistencies. The Xi Jinping administration, which has concentrated power in the hands of the Party and itself, will be held accountable for major results. The future course of fiscal reform and policy management will be closely watched.