Commentary
China’s provinces and local governments have long had to turn to Beijing for financial help. However, the property crisis has cut so much into provincial revenues that pleas to Beijing for financial help have become more frequent and much bigger.
Indeed, these matters have become so urgent that Beijing has begun to consider fundamental fiscal reforms, especially since the property crisis shows no sign of abating.
The trouble for provincial revenues began when the property crisis first broke in 2022, with the loss of once-rich revenue from land transfer taxes and fees. In the intervening years, the revenue shortfall has accumulated, and this year, pressure on provincial budgets seems to have reached a critical level.
According to research from Guizhou Province-based Huachuang Securities, none of China’s provinces can finance their obligations without Beijing’s help. The so-called self-sufficiency rate—a measure of the proportion of a province’s spending that it can finance from its own resources—fell to 55.9 percent in the first quarter of this year, the most recent period for which data are available.
Shanghai’s situation is illustrative. Long ranked among China’s strongest fiscal performers and having regularly reported outright budget surpluses, the city posted only 2 percent revenue growth over the 12 months ended this spring, while its outlays rose by 20 percent.
Beijing has had to step up to cover these budget shortfalls for Shanghai and across the country. It has stepped in like this before, especially since the property crisis broke.
But policy efforts to lift the weight of the crisis have failed, and the intensifying need for funds among the country’s provinces has finally led Beijing to recognize the need for more lasting fiscal reform. Vice Premier Ding Xuexiang has elevated the issue, pointing to the “pilot fiscal management programs” referenced in the 15th Five-Year Plan as concrete steps Beijing and the provinces should take.
One aspect of this proposed reform would be for the central government to relieve some current demands on provincial and local governments by directly funding national priorities. In the past, the funding of many such priorities has been a provincial or local obligation.
Ding has indicated that because current central-to-local transfers are inefficient and opaque, shifting where these financial obligations lie will give provincial governments more discretion in exercising their fiscal powers. Presumably, this discretion will let them cope with the loss of land-transfer revenues, which averaged 31.5 percent less in the first half of this year than in the same period in 2025.
Reformers have also focused on consumption taxes as a way to at least partially fill provincial budget gaps. China already has a significant value-added tax, which acts as a consumption tax. But it also has special levies on 15 items, including cigarettes, alcohol, and automobiles.
In the first half of the year, these special consumption levies brought Beijing about 867 billion yuan (about $129.8 billion) in revenue, making this tax the fourth-largest revenue source after value-added taxes and corporate and individual income taxes.
By shifting the tax incidence from production, where it lies now, to the wholesale or retail level, some of these revenues will be redirected from central government to provincial and local coffers. Such a shift, however helpful, will require legislation and regulatory shifts that will take time.
Ironically, these contemplated changes reverse much of the 1994 fiscal reform. At that time, almost all revenue sources favored provincial and local governments, leaving Beijing chronically short. But then, China’s economy was booming, especially the real estate sector, so land-transfer fees and taxes rose to flood tide.
Now, circumstances, especially the stubborn persistence of the property crisis, require a move in the other direction, shifting revenue from Beijing to provincial and local governments as an alternative to land-transfer revenue. Ding is leading that charge, but there are no assurances that China will manage the change.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
