China’s economic and geopolitical woes keep accruing; collection of ‘retroactive’ taxes, other developments point to local gov’t fiscal shortages

  1   China’s economic and geopolitical woes keep accruing

  China’s economy continues to weaken

June 14
The People’s Bank of China released the following credit and financing data for May 2024:

Credit

• China’s M2 money supply grew by 7 percent year-on-year in May, marking the lowest growth rate on historical record. Meanwhile, China’s M1 money supply declined by 4.2 percent year-on-year during the same period, the largest decline on record.
• Renminbi loans increased by 856.9 billion yuan in May, compared to an increase of 1.36 trillion yuan in the same period in 2023.
  • Household medium- to long-term loans increased by 51.4 billion yuan, compared to an increase of 168.4 billion yuan in the same period in 2023.
  • Corporate and institutional medium- to long-term loans increased by 501.2 billion yuan, compared to an increase of 769.8 billion yuan in the same period in 2023.
• Renminbi deposits increased by 945.2 billion yuan in May, compared to an increase of 1.46 trillion yuan in the same period in 2023.
  • Household deposits decreased by 416.9 billion yuan. Demand deposits accounted for 27.1 percent of household deposits, a slightly higher figure (up 0.1 percent) compared to the previous month. The proportion of demand deposits in household deposits has been decreasing in recent months.
  • Corporate deposits decreased by 807.2 billion yuan. Demand deposits accounted for 27.4 percent of corporate deposits, down 1 percent compared to the previous month.
  • Government agency deposits increased by 120.6 billion yuan.
  • Fiscal deposits increased by 763.3 billion yuan.
  • Deposits from non-banking financial institutions increased by 1.15 trillion yuan.

Social financing

• New social financing increased by 2.06 trillion yuan in May, compared to an increase of 1.56 trillion yuan in the same period in 2023.
  • RMB loans to the real economy increased by 819.7 billion yuan, compared to an increase of 1.22 trillion yuan in the same period in 2023.
  • Government bond financing increased by 1.23 trillion yuan, accounting for 59.4 percent of new social financing. This is compared with an increase of 557.1 billion yuan in the same period in 2023, accounting for 35.8 percent of new social financing.

June 16
The Financial Times reported that China’s residential mortgage-backed securities market was 363 billion yuan in March compared with more than 1 trillion yuan a year earlier, citing data from Fitch Ratings. Fitch also showed that pre-payments jumped in 2023 and are rising again.

Mortgages backing securitizations were repaid at the highest level in 2024 in March, or the equivalent of a prepayment rate of 43 percent on an annualized basis (about four times the typical rate). Analysts said that the data, which partly reflects the impact of the PRC authorities cutting borrowing costs, was a sign of more households opting to repay their debts in the absence of viable investment options and against an uncertain economic backdrop.

June 17
The PRC National Bureau of Statistics released the following economic data for May 2024 and the first five months of the year:

National fixed asset investment

• National fixed asset investment (excluding rural households) increased by 4 percent to 18.8 trillion yuan (calculated on a comparable caliber) during the January to May 2024 period. This represents a year-on-year drop of 0.4 percent when compared to the absolute value published by the PRC authorities last year; when calculated on absolute terms, the national fixed asset investment has declined for 13 consecutive months.

Real estate

• National real estate development investment decreased by 10.1 percent to 4.06 trillion yuan (calculated on a comparable caliber) during the January to May 2024 period. Residential investment was down 10.6 percent to 3.08 trillion yuan.
• The sales area of new commercial housing decreased by 20.3 percent to 366 million square meters during the January to May period. Residential sales area decreased by 23.6 percent to 307 million square meters.
• The sales value of new commercial housing decreased by 27.9 percent to 3.57 trillion yuan during the January to May period. Residential sales value decreased by 30.5 percent to 3.12 trillion yuan.

Sales price of commercial residential property in 70 major cities

• New commercial residential home sales prices:
  • First-tier cities: Prices were down 3.2 percent year-on-year in May from a year ago, compared to down 2.5 percent in April. Prices were also down 0.7 percent month-on-month, compared with down 2.4 percent in April.
    • Prices in Beijing, Guangzhou, and Shenzhen decreased year-on-year by 1.8 percent, 8.3 percent, and 7.4 percent respectively, while Shanghai saw a year-on-year price increase of 4.5 percent.
    • Prices in Beijing, Guangzhou, and Shenzhen decreased month-on-month by 1.1 percent, 1.4 percent, and 0.8 percent respectively, while Shanghai saw a month-on-month increase of 0.6 percent.
  • Second-tier cities: Prices were down 3.7 percent year-on-year in May, compared with down 2.9 percent in April. Prices were also down 0.7 percent month-on-month, compared with down 0.5 percent in April.
  • Third-tier cities: Prices were down 4.9 percent year-on-year in May, compared with down 4.2 percent in April. Prices were also down 0.8 percent month-on-month, compared with down 0.6 percent in April.
• Second-hand residential home sales prices:
  • First-tier cities: Prices were down 9.3 percent year-on-year in May, compared with down 8.5 percent in April. Prices were also down 1.2 percent month-on-month, compared with down 1.1 percent in April.
    • Prices in Beijing, Shanghai, Guangzhou, and Shenzhen saw year-on-year decreases of 8.6 percent, 7.9 percent, 11.4 percent, and 9.2 percent respectively.
    • Prices in Beijing, Shanghai, Guangzhou, and Shenzhen saw month-on-month decreases of 1.2 percent, 1.3 percent, 1.6 percent, and 1.0 percent respectively.
  • Second-tier cities: Prices were down 7.5 percent year-on-year in May, compared with down 6.8 percent in April. Prices were also down 1 percent month-on-month, compared with down 0.9 percent in April.
  • Third-tier cities: Prices were down 7.3 percent year-on-year in May, compared with down 6.6 percent in April. Prices were also down 0.9 percent month-on-month, compared with down 0.9 percent in April.

Retail sales of consumer goods

• Retail sales of consumer goods increased by 3.7 percent to 3.92 trillion yuan in May. Retail sales excluding automobiles increased by 4.7 percent to 3.53 trillion yuan.
  • Retail sales of goods by enterprises above designated size increased by 3.5 percent to 1.38 trillion yuan.
  • Sales of auto-related goods decreased by 4.4 percent to 387.5 billion yuan.

June 18
Reuters reported that Beijing’s latest property support measures have led to increased transactions in China’s biggest cities, but activity in smaller localities is still struggling to pick up. Reuters added that this points to “more pain ahead” for China’s real estate market.

June 19
Mainland media reported that home sales volumes have increased in the cities of Shanghai, Guangzhou, Shenzhen, Wuhan, Chengdu, and Hangzhou in examining the data from the past month after Beijing had introduced its real estate support measures and after interviewing local real estate professionals.

However, mainland media added prices were lowered in many cities to boost home sales.

  Geopolitical pressures

The PRC has come under increased geopolitical pressures recently, including the threat of sanctions by the U.S. and its allies for supporting Russia’s war effort in Ukraine, the U.S. and the European Union imposing electric vehicle tariffs, the prospect of further U.S. restrictions on China’s access to chip technology used for artificial intelligence, and the U.S. and its allies limiting the sale of more chipmaking equipment to China.

Heightened geopolitical pressures appear to have compelled the Xi leadership to signal that it is not keen on aggression, particularly with regard to Taiwan. On June 15, the Financial Times reported that Xi Jinping warned European Commission president Ursula von der Leyen in a meeting in April 2023 that Washington was trying to goad Beijing into attacking Taiwan, but he would not take the bait, citing people familiar with the matter. One person said that Xi also issued similar warnings to PRC officials. According to Financial Times, Xi further said that “a conflict with the U.S. would destroy many of China’s achievements and undermine his goal of achieving a ‘great rejuvenation’ by 2049.”

Xi’s attempt at reassurance did not assuage Western observers about the prospect of a PRC invasion of Taiwan. Center for Strategic and International Studies China expert Jude Blanchette told the Financial Times that “concerns that Xi has created an information vacuum or is otherwise getting poor counsel from subordinates are, worryingly, true” if the PRC leader truly believes that the U.S. is actively seeking conflict with China over Taiwan. Blanchette further speculated that Xi’s comment came about because “some subordinates were trying to steer him away from more aggressive policies,” according to the Financial Times. Ryan Hass, a China expert at the Brookings Institution, wrote that Xi could be signaling that he “is standing in the breach, but if conditions change, conflict could arise.”

Some commentators believe that Xi’s comment is simply “gaslighting” and an attempt to blame the U.S. when the PRC does invade Taiwan. Meanwhile, other commentators felt that Xi was being disingenuous about not wanting conflict with the U.S. given the PRC’s maritime confrontations in the South China Sea with the Philippines (including various gray zone tactics and a recent ship collision), a U.S. treaty partner.

  Backdrop

Domestic and foreign investors, as well as other observers, are expecting the Xi leadership to introduce major economic and political reforms to rescue China’s real estate sector and the economy more broadly at the Third Plenum of the 20th Central Committee in July.

  Our take

The PRC’s continued economic woes and various domestic and international pressures are casting a pall over the upcoming Third Plenum, as well as heightening political risks for Xi Jinping and the CCP.

1. Beijing’s latest official economic data show that the Chinese economy is in poor shape and the Xi leadership’s latest policies are having minimal to no effect as regards turning things around.

i) Investment and consumption, or two out of China’s “troika” of growth drivers, remain weak. The following indicators suggest that both individuals and businesses are reluctant to consume and invest:

• When calculated in absolute terms, national fixed asset investment has been in decline for 13 consecutive months with the release of the May figures.
• Retail sales in May 2024 were even lower than that in 2023 despite a year of “recovery.” The highest growth in retail sales this year came in January (5.5 percent). A review of retail sales growth since the end of “zero-COVID” in January 2023 shows only five months with growth in the double-digits, with the growth in those months likely being inflated due to China having just reopened after three years of lockdowns and the low base in 2022. Correspondingly, the decline in residential and business deposits in May suggests a drop in incomes and cash flows, which in turn leads to weak consumption.

ii) Real estate data shows double-digit declines in various metrics, a worrisome sign as the real estate industry is a key pillar of the Chinese economy. The real estate sector’s poor performance in May 2024 suggests that Beijing’s so-called “historic” property policies introduced in mid-May only had a limited effect.

While there was an increase in housing transaction volume in big cities after the release of Beijing’s real estate support measures, this appeared to be partly linked to falling prices of both new and second-hand homes. First-tier cities Guangzhou (new home prices down 8.3 percent year-on-year, second-hand home prices down 11.4 percent year-on-year) and Shenzhen (new home prices down 7.4 percent, second-hand home prices down 9.2 percent) saw the largest declines in home prices. The situation is particularly bleak in the second-hand housing market, where listings have surged and prices have dropped significantly.

iii) The dramatic slowing of growth or declines in China’s money supply, credit, and social financing further highlights the unwillingness of Chinese residents and businesses to spend and invest.

China’s M2 growing at the slowest rate on record and M1 seeing the largest decline to date appears to be partly due to a significant reduction in mortgages as property owners make early repayments. Correspondingly, household medium- to long-term loans, which are mostly mortgages, increased by 51.4 billion yuan in May, or just 30.5 percent of the loans in the same period in 2023.

Medium- to long-term loans to corporations and institutions were up in May 2024 as compared to the previous year, but those loans appeared to mainly come from the PRC authorities given that corporate deposits had decreased while government deposits increased. The shrinking proportion of demand deposits in corporate deposits also indicates that businesses are not investing.

Meanwhile, new social financing in May excluding government financing (59.4 percent of the total) was just 838.2 billion yuan, a drop of 160.7 billion yuan compared to the same period last year. Government financing would also have a limited impact on stimulating the economy as the bulk of it likely went to debt repayment. According to a June 17 report by Wanlian Securities, the scale of new local government bonds issued to repay old ones reached 1.39 trillion yuan from January to May 2024, accounting for 80 percent of the total issuance.

2. We believe that the CCP will introduce some political and economic reform measures at the Third Plenum, but those measures are unlikely to reverse China’s real estate woes or shift the downward trajectory of the Chinese economy.

The PRC authorities could consider passing tax reforms to boost local government fiscal revenue given the sluggish property market and the significant reduction in local government land revenue. Reforms could involve allocating more tax revenue to local governments as a way to incentivize local officials to stimulate consumption and develop the economy. For one, Beijing could adjust the consumption tax and allocate more of it to local governments. However, the effectiveness of tax reforms would be limited due to the general drop in income, the lack of stable income growth, and rising unemployment.

Worse, tax reforms are unlikely to yield immediate results and could inspire local officials, who are driven by short-term and parochial interests, to resort to measures that are detrimental to resolving their fiscal problems over the long term. For instance, mainland media reported that V V Food & Beverage Co., a listed company, announced on June 13 that a subsidiary that it used to control was required by the local government to pay 30 years worth of back taxes totaling 85 million yuan (for more, see the second item in the newsletter). Such aggressive tax moves place tremendous pressure on businesses and individuals, and stand to worsen China’s current problem of insufficient consumption and investment.

Beijing could also roll out more property measures and lift more restrictions at the Third Plenum, but such moves are unlikely to resolve the real estate crisis. Even the lifting of all property purchase restrictions cannot address the fundamental problem of demographic decline (including an annual population increase of below 10 million since 2000, low marriage and birth rates, and large-scale pandemic-related deaths) and the industry’s lack of growth potential. The PRC authorities have attempted to absorb some of the current housing inventory by setting up a 300 billion yuan housing support refinancing fund, but the funds available are a drop in the bucket considering the current housing stock is estimated at 7 trillion yuan.

The Xi leadership and the CCP will likely sustain a severe blow to their “quan wei” and political legitimacy if the policies and measures issued at the Third Plenum fail to turn around the Chinese economy. A collapse in confidence in Xi and the CCP among domestic and foreign investors could exacerbate China’s current economic and financial woes, pushing the CCP regime to the brink.

3. The reaction of Western and international observers to Xi Jinping’s warning to European Commission president Ursula von der Leyen and domestic officials that the U.S. was trying to goad Beijing into attacking Taiwan and he would not take the bait as reported in the Financial Times suggests that the credibility of Xi and the CCP have reached an all-time low internationally. Years of learning about the CCP threat and global hegemonic ambitions have left the international community deeply skeptical about the Party and its leaders, and the initial reaction now is to distrust any rhetoric from Beijing.

The distrust and skepticism shown towards Beijing make it significantly harder for Xi and the CCP to split the U.S. and its allies through diplomacy and influence operations. The Xi leadership is also left with little room to maneuver or de-escalate tensions as countries increasingly decide to get tough on the PRC, be it over Beijing’s support of Russia in its war with Ukraine or to address China overcapacity concerns.

Xi and the CCP are fast becoming victims of their own propaganda and policies as international sentiment turns against Communist China. On the one hand, Beijing needs to keep up appearances as a “great power” and appear “tough” on Taiwan and in the South China Sea to assert its dominance. On the other hand, Beijing’s rhetoric and actions with regard to Taiwan and the South China Sea are alarming the international community and forcing the U.S. and its allies to take measures that the CCP would be compelled to interpret and treat as a challenge to its interests. And should Washington or other countries act in a manner that Beijing deems has crossed its “red lines,” the Xi leadership is currently in a very poor position to resort to serious aggression and follow through on its tough positions given the rapid deterioration of the Chinese economy, the People’s Liberation Army’s lack of readiness and severe problems with corruption, and the growing crisis of confidence domestically in the CCP’s governing ability. This means that geopolitical pressures have the potential to worsen the PRC’s economic and social problems, which would in turn heighten political risks for Xi and the CCP.

  2   Collection of ‘retroactive’ taxes, other developments point to local gov’t fiscal shortages

Local government financial problems have recently been bubbling to the surface with the deterioration of China’s economy.

  Firms asked to pay retroactive taxes

Since the start of the year, several listed Chinese companies said that they were asked by local governments to pay taxes dating back as far as the 1990s. The highest amount a company was asked to pay was 480 million yuan and the performance of many firms was affected. The search term “30-year retroactive tax investigations” became a trending topic on the Chinese internet.

June 12
NingBo BoHui Chemical Technology Co. Ltd. announced that it would suspend production on its aromatics extraction unit, environmentally-friendly aromatic oil production unit, and related supporting facilities because the Ningbo provincial tax authorities were requiring the company to pay hefty retroactive taxes.

BoHui said that Ningbo tax authorities notified it on March 27, 2024 that it had to pay consumption taxes on the “heavy aromatic hydrocarbon derivatives” its machine produced after the authorities reclassified the chemical product, which is not taxed, as a taxable “heavy aromatic hydrocarbon.” BoHui added that the tax payments affect the company’s annual profit for 2023 by about 300 million yuan and profit for the first quarter of 2024 by about 200 million yuan, and will significantly impact the company’s performance for 2023 and subsequent years. BoHai also said that the company expects to shift from being profitable to incurring substantial losses in 2023.

June 13
V V Food & Beverage Co. announced that Hubei Zhijiang Distillery, a subsidiary that it used to control, was required by the Zhijiang Development Zone tax authorities to pay a retroactive consumption tax of about 85 million yuan for the period from Jan. 1, 1994 to Oct. 31, 2009.

***
Mainland media reported that other listed companies that have been asked to pay retroactive taxes and late fees this year include:

January

• Lianjian Optoelectronics: Paid 19.795 million yuan in corporate income tax for 2017 and 20.2 million yuan in late fees.

April

• Shunho Stock Co. Ltd.: Pay 8.1927 million yuan in taxes and late fees for the period from December 2017 to December 2018.
• Peking University Pharmaceutical: Paid 19.4473 million yuan in taxes and late fees for the period from 2019 to May 31, 2023.
• Zangge Mining: Paid about 480 million yuan in taxes and late fees for the period from 2021 to 2023.
• Hualin Securities: Pay about 47 million yuan in taxes and late fees for the period from 2018 to 2021.

June 18
1. The PRC’s State Taxation Administration announced on its website that it had not launched a national, industry-wide, or concentrated tax inspection campaign, and nor does it plan to retroactively investigate tax evasion that could be traced back 20 or 30 years.

The State Taxation Administration added that the recent reports concerning tax inspections and supplementary tax payments are routine procedures to urge companies to pay taxes from previous years in accordance with regulations or the notification of companies of risks in applying tax policies, all of which are normal legal duties performed by the tax authorities.

2. Hu Xijin, the former editor-in-chief of state mouthpiece Global Times, published an article (多掛 “警稅合成作戰中心” 牌子, 這不妥吧) questioning the appropriateness of local governments setting up “police-tax synthesis combat centers” (警稅合成作戰中心) and whether the practice might mislead the public into believing that public security forces are being mobilized to aid in tax collection (財政靠公安) in some localities.

Hu wrote that “combat” is a military term and typically implies the presence of an enemy. He then implied that the people will naturally suspect that they are the designated “enemy” of the “police-tax synthesis combat centers.”

Hu also noted that historically, some local governments introduced tax reduction policies or took flexible approaches to lighten the tax burden on enterprises to attract investment and revitalize the private economy. While the aforementioned measures existed in a gray area, local governments did not pursue entities for illegality and the measures eventually became part of actual policy. Hu added that retroactively scrutinizing the gray measures and asking enterprises to pay back taxes is a very complex and sensitive subject, and would become even more sensitive if entities are charged with criminality.

Hu further wrote that there has been a continuous stream of reports of small- and medium-sized business owners being arrested or losing their freedom following investigations into corrupt officials and being asked to assist with investigations. He added that he had personally known several cases where business owners were detained for several months before being released, and that they emerged with their spirits broken and without any confidence to continue their respective businesses. Hu wrote that while those incidents are unrelated to taxes, they “intermingle and resonate with other information,” affecting the broader private economy.

Hu Xijin’s article was reposted by some major news platforms, but was subsequently deleted.

  Beihai City scraps its ‘chengguan’

June 10
The local government of Beihai City in Guangxi Province announced that the city’s “comprehensive administrative enforcement bureau” (better known colloquially as the “urban management department,” or “chengguan” [城管]) would no longer be retained and that the various responsibilities of the bureau would be transferred to relevant departments according to the city’s institutional reform plan.

Many netizens interpreted the announcement as a sign that the Beihai local authorities had scrapped the “chengguan.” However, the former staff of the Beihai comprehensive administrative enforcement bureau told mainland media that the functions of the bureau had merely been delegated to the city’s districts and personnel would be reassigned accordingly.

Beihai’s comprehensive administrative enforcement bureau was established in March 2019 and took over urban management functions from the Beihai City municipal management bureau.

According to publicly available information, Beihai’s GDP in 2023 increased by 5.8 percent to 175.091 billion yuan. Also in 2023, the city’s general public budget revenue was 7.36 billion yuan and general public budget expenditure was 19.412 billion yuan, leaving the city with a deficit of 12.052 billion yuan.

  No work for provincial LGFV managers

June 17
A document from Sichuan Shudao Urban and Rural Investment Group, a local government financing vehicle and subsidiary of the large state-owned enterprise Shudao Group, titled “Guidance on Management Personnel Awaiting Work Assignments” (關於管理人員待崗的指導意見) was circulated on Chinese social media.

The document said that the company’s management personnel on the payroll (編制) will be “awaiting work” (i.e. sent home to wait for job assignments) for a period not exceeding two years. During this period, they will only receive a basic salary and social security contributions.

***
Shudao Group’s total assets were in excess of 1.34 trillion yuan at the end of 2023. The company ranked 389th on the Fortune Global 500 list and is one of the top provincial transportation enterprise companies in China.

  Backdrop

1. The PRC finance ministry issued 1 trillion yuan in ultra-long-term special government bonds in May, including 300 billion yuan in 20-year bonds, 600 billion yuan in 30-year bonds, and 100 billion yuan in 50-year bonds.

2. The PRC Ministry of Housing and Urban-Rural Development, Ministry of Finance, and People’s Bank of China jointly released the 2023 annual report on the housing provident fund.

The report showed that there were 48.359 million people contributing to the housing provident fund in 2023 from state agencies and public institutions while 30.5497 million people were from state-owned enterprises; the 78.9087 million people from the two groups accounted for 45.21 percent of all housing provident fund contributions. Of the two groups, new account holders accounted for 23.32 percent of the total (2.7227 million people and 1.9817 million people).

  Our take

The various news items above indicate that local governments are experiencing financial shortages as the Chinese economy worsens, and government departments are trying various methods to increase revenue and cut expenses.

1. It is possible that the State Taxation Administration had not launched a comprehensive, nationwide campaign as it claimed in a bid to crack down on tax misconduct and collect retroactive taxes amid mounting fiscal stress. However, the fact remains that local authorities have asked numerous companies to pay substantial retroactive taxes and late fees, affecting the operations of the latter entities. Such a move by local governments will further damage the already fragile business environment in China, affect the profitability of companies and force business closures, and ultimately weaken China’s tax base.

The push by local governments to collect retroactive taxes makes life harder for businesses that are already struggling with China’s “lethal tax rates” (死亡稅率). In a 2016 research report, renowned Chinese tax expert Li Weiguang noted that the actual tax burden rate for Chinese enterprises is close to 40 percent while most companies have a profit margin of less than 10 percent. To survive in China’s high-tax business environment, companies either evade taxes or bribe officials to receive preferential tax rates or leniency in tax collection. When the economy was booming, the tax authorities tended to be lenient in tax audits. But with the current fiscal tightness and pressure from the higher authorities, the tax authorities are inclined to carry out audits more strictly and discover tax evasion.

The tax authorities at various levels of government are compelled to tighten audits and other efforts to recoup tax revenue given the flaws in the PRC’s tax-sharing system. Typically, the central government takes 60 percent of the tax revenue while local governments bear 80 percent of the responsibilities of government functions. With the real estate downturn and a significant drop in land sales revenue, local governments are under increased pressure to ask companies for retroactive taxes and find other revenue streams to ease their financial difficulties. The central government is also pressured to collect more revenue through taxes so that it can continue to support the troubled local governments. In the first four months of 2024, all local governments with the exception of Shanghai relied on fund transfers from the central government to maintain operations. The central government had also allocated a transfer payment budget of as high as 10 trillion yuan in 2024.

2. Beihai City’s scrapping of its “chengguan” organization is a sign of local governments implementing cost-saving measures to ease their financial burden and tide over their fiscal shortages.

The Beihai local government established its comprehensive administrative enforcement bureau in 2019 as part of the central government’s plan to centralize administrative enforcement power across various domains, including the “chengguan” functions previously handled by the city’s urban management bureau. However, the city’s poor fiscal situation likely forced it to streamline its bureaucracy and have various departments take up their share of enforcement work while urban management responsibilities were delegated to the districts. The delegation of duties, however, will likely weaken the local government’s enforcement and “stability maintenance” capabilities. Previously, we noted that state security forces, likely due to a budget shortfall, had shifted the burden of monitoring and “controlling” Chinese dissidents during the Tiananmen Square Massacre anniversary period to local street offices.

The PRC authorities face immense fiscal pressure to support the large number of government workers on its payroll. According to the 2023 housing provident fund annual report, China had 48.359 million employees in state agencies and public institutions. The average annual salary of employees in urban non-private units was 120,700 yuan in 2023, resulting in a fiscal expenditure of 5.84 trillion yuan or 26.9 percent of the national general public budget revenue (21.68 trillion yuan) in 2023. The 5.84 trillion yuan figure does not include the amount the government has to fork out to pay the pensions and benefits of retired personnel.

3. The managerial personnel of Sichuan Shudao Urban and Rural Investment Group being made to “await work” is another sign that China’s real estate crisis is very severe and local governments are facing increasing fiscal pressure.

The property crisis is making it difficult for heavily indebted local governments to raise funds through LGFVs like Shudao Urban and Rural Investment Group, especially because the raised funds would be used chiefly for debt repayment rather than new investment. This in turn makes it more challenging for LGFVs to operate and develop, hence leading them to have managerial staff “await jobs.”

4. The measures taken by the PRC authorities to address their fiscal predicament have lowered the Chinese people’s confidence in the CCP and its governing ability. Many Chinese netizens have recently made the sarcastic observation that the authorities are “spending the money of the next 50 years (through issuing ultra-long-term special government bonds) and collecting taxes from 30 years ago.”

We believe local governments in the PRC are unlikely to resolve their fiscal troubles in the short term and may even make things more difficult for themselves over the long term with their current measures. Fiscal shortages will affect administrative operations and the PRC authorities’ ability to “maintain stability.”