Government must bite the bullet

Further reductions in administrative costs and improvements in efficiency needed in the face of lower fiscal revenue

China's central fiscal revenue declined 0.8 percent year-on-year in the first four months of this year, and a per capita 11.3 percent monthly growth is needed in the following months if the country wants to achieve the growth target set early this year, according to a report delivered to the Standing Committee of the National People's Congress on June 27 by the Minister of Finance, Lou Jiwei.

Considering lukewarm economic growth in the latter half of this year and a possible fiscal revenue decline, as a result of the widespread implementation of the policy to convert business tax into value added tax, due on August 1, China's full-year central fiscal revenue faces gloomy prospects.

Similarly, there has been lower-than-expected growth in local fiscal revenue. China's local fiscal revenue was 4.89 trillion yuan ($798 billion) in the first five months, a 6.9 percent increase year-on-year, 2.5 percentage points lower than a year earlier. The fiscal revenue grew only 0.1 percent year-on-year in the Inner Mongolia autonomous region in the first five months, much lower than a planned 14 percent full-year growth, while Liaoning province witnessed 5.2 percent growth during the same period, compared with the planned full-year growth of 11 percent, and Shaanxi province witnessed 6.55 percent growth, in sharp contrast with a 16 percent growth planned for the whole year.

Worse, the recent "liquidity crunch" that broke out among some domestic banks makes the outlook for the country's fiscal revenues at both the central and local levels even gloomier in the context of the weak national economic momentum.

It is widely believed that the recent liquidity insufficiency was a temporary and structural monetary problem largely caused by seasonal interest rate fluctuations and panics following the changes in market expectations. However, a series of problems accumulated among domestic banks, such as huge volumes of interbank debts and their maturity mismatch, cannot be resolved within a short period. This, together with increased pressures for performance assessment at the end of every quarter, the expiry of wealth management products, the outflow of hot money and tightening financial supervision from the authorities, means that the funds in China's financial system will tend to be at a tightened balancing level in the latter half of this year.

The new leadership's unambiguous refusal to inject liquidity into the market has sounded an alarm that financial institutions should stop their previous practice of excessively using maturity mismatch for financial expansion. It is expected that domestic financial institutions will strengthen their liquidity management, accelerate deleverage of their wealth management products and optimize their credit structures in a bid to channel more funds into the real economy in the future. Such kind of funds rebalancing and the prioritizing of the real economy will facilitate the transformation of China's economic structure and its long-term growth, but it will also be a drag on its fiscal revenue growth.