News Analysis

The 20th Central Committee of the Chinese Communist Party will convene its third plenary session next week in Beijing, aiming to initiate a new round of economic reforms.

Some analysts expect the reforms to include adjustments in the allocation of financial revenues and expenditures between central and local governments, potentially allowing local governments greater autonomy in retaining tax revenues. They say this strategy is intended to alleviate local governments’ debt burden while giving them more fiscal responsibilities.

Plenary sessions have played pivotal roles in China’s economic reforms, garnering attention from the international community. The Third Plenum will be held from July 15 to July 18.

On June 25, Chinese Finance Minister Lan Foan presented a report on the central government’s 2023 budget to China’s rubber-stamp legislature, the National People’s Congress, emphasizing the importance of advancing fiscal and tax system reforms.

Chinese media have underscored the viewpoint of domestic experts advocating for reforms that rejuvenate local economies by empowering local governments with greater fiscal resources.

CITIC Securities, a leading Chinese securities firm, anticipates that the Chinese Communist Party’s (CCP’s) reforms will focus on recalibrating the financial relationship between central and local governments to address current imbalances in financial powers and responsibilities.

Local governments currently receive half of value-added tax revenue and 40 percent of personal income tax, while the central government collects most corporate income tax and all consumption tax from manufacturers and importers, according to Ministry of Finance data.

The CCP previously undertook tax-sharing reforms in response to fiscal challenges, including establishing separate national and local tax departments in 1994, which were merged in 2018. Over the years, significant reforms have been aimed at adjusting the distribution of financial resources between the central and local governments. Notably, changes in 2002 and subsequent years reduced the scope of local tax systems, while mergers in 2018 further centralized financial oversight.

From 2011 to 2021, land sales contributed significantly to local budgets, rising from one-fifth to nearly one-third of total revenue. However, a downturn in the real estate market since 2021 has led to a sharp decline in these revenues, which dropped from a peak of $1.3 trillion in 2021 to $780 billion in 2023.

Taxes

In an interview with the Chinese edition of The Epoch Times on July 4, economist David Huang discussed Beijing’s fiscal centralization, which involves redistributing local tax revenues through transfer payments. This approach has caused dissatisfaction among economically prosperous provinces, where taxes sent to Beijing often exceed returns, while less affluent regions heavily rely on central subsidies, he said. The issue remains unresolved because the central government manages transfers as a unified entity, resulting in discrepancies in fund allocation.

“The recent push for fiscal and tax reforms coincides with worsening local financial conditions. Contrary to widely held beliefs, these reforms aren’t solely driven by financial constraints. Local finances are strained, and relying solely on tax-sharing reforms won’t resolve these issues in the short term,” Mr. Huang said.

China observer Ye Zhiqiu, a New Zealand-based media professional, told The Epoch Times that the CCP’s reforms are a response to the persistent “unreasonable distribution” of tax revenue between the central and local governments, and they aim to give some financial responsibilities back to the local governments.

According to Mr. Ye, income disparities among Chinese provinces have long fueled tensions between central and local governments. These tensions have been exacerbated by recent moves to consolidate financial authority under Beijing, notably after the 2018 merger of central and local tax bureaus. This centralization has seen affluent provinces subsidizing less prosperous ones through centralized redistribution.

“In the past, local officials derived benefits primarily from real estate and infrastructure projects, which yielded political clout, GDP growth, and substantial informal gray incomes,” Mr. Ye said.

“However, the real estate market’s collapse has severely curtailed these revenue streams, leading to discontent among officials who previously benefitted from fiscal maneuvering and corruption.”

Mr. Ye emphasized that while dissatisfaction with the CCP’s financial policies isn’t new, recent reforms aim to appease local officials by allowing greater autonomy over tax revenues, thereby supporting the regime’s stability. This shift also signals a renewed emphasis on local accountability for fiscal deficits, challenging the narrative of “unreasonable distribution” solely attributed to the central government, he added.

CCP Targets Companies

In recent weeks, some local tax departments across China have requested that several companies pay tax bills dating back as far as three decades.

On June 13, authorities launched an investigation into V V Food & Beverage’s liquor unit, demanding some $11 million on income it allegedly failed to disclose 15 years ago, according to Chinese media. VV is a well-known soymilk brand in China with more than 30 years of experience in the food industry.

Around the same time, Zhejiang Ningbo Bohui Chemical Technology Co. Ltd. announced the partial suspension of its aromatics oil production facility, citing the need to settle tax arrears amounting to nearly $70 million.

Since the beginning of this year, in addition to V V Food & Beverage, four other A-share listed companies have disclosed significant tax liabilities. In comparison, in 2021, 2022, and 2023, three, one, and five listed companies, respectively, reported similar tax payment disclosures.

Mr. Ye commented on the timing of these investigations.

“This reflects the severe financial strain faced by local governments. The real estate market’s collapse has deprived officials of previous benefits, and in some regions, even public servants’ salaries have been affected. Consequently, local government authorities seek to augment private sector funds through these retroactive investigations,” Mr. Ye said.

Xin Ning and Reuters contributed to this report.