China’s fiscal deficit hits record as Covid and property slump take toll

A broad measure of China’s budget deficit hit a record high in the first 11 months of this year as a real estate meltdown and President Xi Jinping’s zero-Covid policy weighed on the world’s second-largest economy.

Total fiscal spending by all levels of government exceeded revenue by Rmb7.8tn ($1.1tn) from January through to November, according to the Ministry of Finance. The figure was more than double the Rmb3.7tn reported during the same period of last year. 

The rise in the government deficit highlights the economic damage from Xi Jinping’s signature Covid-19 elimination policy — which entailed relentless contact tracing, testing and lockdowns to root out coronavirus — as well as a crackdown on housing speculation by his government.

Beijing abruptly abandoned the zero-Covid policy this month following growing case numbers, a slowing economy and mounting popular resistance.

“This is the worst [in recent years] for China’s public finances,” said Larry Hu, a Hong Kong-based economist at Macquarie Group. “A host of negative factors are coming together.”

A slump in land sales, a big source of government income, was one of the main reasons for the higher deficit. China’s local authorities made Rmb5.1bn from selling land in the first 11 months of this year, down almost a quarter from a year before. 

The decline came as debt-laden developers, led by the private sector, stopped growing their landbanks after regulators tightened their access to credit and home sales sank. 

Tax cuts, a critical part of Beijing’s efforts to stimulate the sluggish economy, have dealt a further blow to fiscal income. Official data shows China’s value added tax collection, one of the biggest sources of budgetary income, fell more than a quarter in the first 11 months of this year after Beijing cut VAT rates and offered rebates to revive growth. 

Revenue from taxes on car purchases fell by almost a third during the same period as Beijing cut tax rates to boost big ticket consumer items.

The government’s fiscal outlay, meanwhile, led by healthcare and social welfare spending, continued to grow as Beijing struggled to curb the pandemic and provide a safety net for a fast-growing population of jobless adults.

Ministry of Finance data showed government healthcare spending surged 15 per cent in the first 11 months of this year as the authority invested heavily in PCR testing and centralised quarantine facilities to stamp out the pandemic.

As government financial woes deepen, authorities are coming under pressure to cut back on expenditure.

Zhong Zhengsheng, chief economist at Ping An Securities in Beijing, said China’s fiscal outlay would fall 12 per cent in December following many months of increases.

“Since the deficit target stays unchanged, the authorities have to reduce spending to offset the drop in revenue,” Zhong said.

Zhong added that public finances might improve next year as China exited zero-Covid and relaxed control over the private sector, which has been battered by regulatory campaigns over issues such as data security.

“There won’t be so many negative factors that dampen growth next year,” said Zhong. 

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