China’s fiscal reform_Speeding up reforms to counter external risks

Summary of Key Points from the Conference Call Industry Overview - The conference call focuses on China's fiscal reform and its implications for the economy amid ongoing trade tensions with the US. Core Insights and Arguments 1. Impact of Trade Tensions: The US has imposed a 10% tariff on Chinese goods, which is estimated to reduce China's GDP by 0.3 percentage points. However, this situation may prompt Beijing to implement more aggressive fiscal easing and structural reforms [2][7][43]. 2. Fiscal Reform as a Priority: The Third Plenary Session of the 20th CPC Central Committee emphasized fiscal reform as a high priority, aiming to enhance fiscal sustainability and streamline the fiscal relationship between central and local governments [9][14][44]. 3. Key Themes of Fiscal Reform: The reform agenda includes: - Enhancing the budget system - Refining the tax system - Streamlining the fiscal relationship between central and local governments [10][14]. 4. Local Government Debt Issues: Local government debt has been a persistent issue, exacerbated by declining land sales, which have fallen for four consecutive years, leading to a total revenue decline of RMB3.8 trillion [15][11][16]. 5. Consumption Tax Reform: A significant aspect of the tax reform is the shift of the consumption tax collection point from production to consumption, which is expected to increase local tax revenue and incentivize local governments to focus on consumption [4][20][22]. 6. Zero-Based Budgeting: The introduction of zero-based budgeting aims to improve fiscal discipline by requiring all expenses to be justified from scratch each fiscal year, moving away from traditional base-budgeting techniques [40][41]. 7. Incentive-Compatible Framework: Establishing a balanced revenue and spending sharing framework between central and local governments is crucial for improving efficiency and effectiveness in governance [13][15]. Additional Important Content 1. Monetization of Idle Assets: China has initiated efforts to monetize over RMB40 trillion of idle assets to improve fiscal sustainability [35]. 2. Increased Transfer Payments: The central government has steadily increased transfer payments to local governments, from RMB4.5 trillion in 2012 to RMB10.2 trillion in 2024, indicating a shift towards supporting local fiscal health [27]. 3. Tax Structure Adjustments: The tax structure will be refined to better adapt to new business forms and promote high-quality growth, with a focus on increasing the share of direct taxes [28][29]. 4. Performance-Based Budgeting: A performance-based approach is expected to be adopted to enhance budgetary management and resource allocation efficiency [5][36]. This summary encapsulates the critical points discussed in the conference call regarding China's fiscal reforms and their broader implications for the economy and governance.