China's fiscal revenue accelerated, but spending slowed again, making catch-up in execution crucial to growth for the rest of the year

Overview

The report analyzes China's fiscal revenue and expenditure in July and the subsequent policy path. Its core assessment is that improved revenue has yet to translate into expenditure and physical work completed, while sluggish fiscal execution is an important reason for the recent downgrade to the growth forecast. Policy during the remainder of the year first needs to accelerate the deployment of existing resources; if growth continues to weaken, it may then enter a phase of additional support.

Core views

July's fiscal data showed a clear divergence between accelerating revenue and decelerating expenditure. General public budget revenue grew 11.7% year over year, the fastest pace in 19 months, lifting year-to-date revenue growth to 5.8%, significantly above the full-year budget target of 2.2%. The report mainly attributes the improvement in revenue to PPI-related tailwinds and tax growth, with corporate income tax, individual income tax, and stamp duty rising 21.8%, 25.9%, and 28.4% year over year, respectively. This means the revenue side has improved markedly, but fiscal support for the real economy still depends on whether funds can be converted into actual expenditure in a timely manner. Expenditure lost momentum again after a brief rebound in June. General public budget expenditure grew by only 0.5% year over year in July, down from 4.0% in June. Infrastructure-related expenditure fell 3.6% year over year, consistent with the deepening contraction in infrastructure fixed-asset investment. Growth in livelihood-related expenditure associated with "investing in people" also slowed from 8.4% in June to 1.5%. Year-to-date expenditure grew by only 1.3%, far below the full-year budget target of 4.4%, indicating that budget execution remains insufficient. The report therefore views sluggish fiscal execution as one of the key factors behind its recent downgrade to the third-quarter growth forecast. The divergence between revenue and expenditure was also reflected in the unusual increase in fiscal deposits. Fiscal deposits rose by RMB1 trillion in July, equivalent to 0.7% of GDP, compared with an average increase of approximately RMB0.7 trillion during the same period in previous years. The report believes this indicates that a considerable amount of fiscal resources has yet to be deployed. The issue is not insufficient fiscal firepower, but rather the slow pace of fund utilization and policy transmission. The accumulation of fiscal deposits therefore both explains why current support has not been fully reflected and provides room for a stronger catch-up in spending during the remainder of the year. Government-managed fund revenue and expenditure remained in contraction, although the declines narrowed somewhat. Government-managed fund revenue fell 19.2% year over year in July, while land sale revenue declined 27.1% year over year. This was an improvement from June, but followed what had previously been the steepest monthly decline in more than a decade. Government-managed fund expenditure fell 16.3% year over year, also a somewhat milder contraction. Because government-managed fund revenue is highly dependent on land sales, while expenditure is closely linked to land-related spending and the use of local government special-purpose bond proceeds, the ongoing correction in the housing and land markets continues to weigh on local government revenue and financing conditions. On the policy path, JPMorgan maintains its "two-phase" assessment. The first phase will focus on accelerating the use of already-approved fiscal resources, including the remaining government bond quota expected to amount to approximately 3% of GDP before year-end, nearly 1 percentage point higher than at the same time last year. It also includes RMB800 billion in policy bank instruments, equivalent to approximately 0.5% of GDP. The key is not only to complete the financing but also to accelerate fiscal expenditure so that funds translate into more physical work completed. However, imminent personnel changes among local officials and heightened risk aversion may continue to delay project implementation, causing fiscal support to feed through to economic growth more slowly than expected. The second phase depends on the growth outlook. If near-term growth momentum weakens further and the full-year growth target of 4.5%-5.0% comes under greater pressure, policymakers may strengthen countercyclical support in line with the Politburo's requirements. The report believes incremental policies remain an option to safeguard the full-year growth target and could include expanded interest subsidies and other coordinated fiscal and financial measures, as well as other quasi-fiscal instruments. However, targeted additional support is more likely than a broad, forceful stimulus package.

Analysis framework

The report first compares July's general public budget revenue and expenditure with the full-year budget targets to identify the gap between improving revenue and sluggish expenditure. It then uses changes in fiscal deposits to estimate the amount of fiscal resources not yet deployed and analyzes execution constraints in conjunction with government-managed funds, land sale revenue, and local financing conditions. Finally, it projects the subsequent policy path under a two-phase framework of first accelerating the use of existing resources and then providing additional support if the growth target comes under pressure.

Methodology notes

• Macroeconomic framework

  Comparison of fiscal budget execution progress

  The report compares year-to-date growth in actual fiscal revenue and expenditure with the full-year budget targets to assess whether fiscal resources are being converted into economic support as planned.

• Macroeconomic framework

  Fiscal deposits as an indicator of undeployed fiscal resources

  An unusual increase in fiscal deposits implies an accumulation of funds that have been raised but not yet spent. On this basis, the report concludes that substantial fiscal resources remain available for accelerated deployment during the rest of the year.

• Event gaming and behavioral financeEvent-driven analysis

  Two-phase fiscal policy path

  The report first assesses the catch-up in executing existing fiscal resources and then uses near-term growth momentum and whether the full-year growth target of 4.5%-5.0% comes under pressure as triggers for additional policy support.

Key data

• July general public budget revenue growth11.7% year over yearThe fastest pace in 19 months.
• Year-to-date general public budget revenue growth5.8% year over yearAbove the full-year budget target of 2.2%.
• Corporate income tax growth21.8% year over yearOne of the main contributors to the acceleration in tax revenue in July.
• Individual income tax growth25.9% year over yearOne of the main contributors to the acceleration in tax revenue in July.
• Stamp duty growth28.4% year over yearOne of the main contributors to the acceleration in tax revenue in July.
• July general public budget expenditure growth0.5% year over yearSlowed markedly from 4.0% in June.
• Infrastructure-related expenditure growth-3.6% year over yearConsistent with the deepening contraction in infrastructure fixed-asset investment.
• Livelihood-related expenditure growth1.5% year over yearSlowed from 8.4% in June.
• Year-to-date general public budget expenditure growth1.3% year over yearBelow the full-year budget target of 4.4%.
• Increase in fiscal deposits in JulyRMB1 trillion, approximately 0.7% of GDPAbove the average increase of RMB0.7 trillion during the same period in previous years.
• July government-managed fund revenue growth-19.2% year over yearStill contracting, but improved from June.
• July land sale revenue growth-27.1% year over yearThe decline narrowed somewhat, but it continued to weigh on local government finances.
• July government-managed fund expenditure growth-16.3% year over yearStill weak, although the contraction moderated somewhat.
• Remaining government bond quota before year-endExpected to amount to approximately 3% of GDPNearly 1 percentage point higher than at the same time last year.
• Policy bank instrumentsRMB800 billion, approximately 0.5% of GDPPart of the existing policy resources that can be deployed more rapidly in the first phase.
• Full-year economic growth target4.5%-5.0%The degree of pressure on the target will affect whether policy enters the additional-support phase.

Impact & implications

The report argues that the current problem primarily lies in insufficient execution and transmission of fiscal funds rather than a shortage of available resources. If the remaining bond quota, policy bank instruments, and budget expenditure are deployed more rapidly during the rest of the year, fiscal support could make a greater contribution to growth. If execution remains sluggish and the growth target comes under greater pressure, policymakers may expand interest subsidies or use other quasi-fiscal instruments, although a large-scale stimulus package remains unlikely.

Risks

• Personnel changes among local officials and heightened risk aversion may continue to delay the deployment of fiscal resources and slow the transmission of fiscal support to economic growth.
• The ongoing correction in the housing and land markets may continue to weigh on land sale revenue, local fiscal revenue, and financing conditions.
• If near-term growth momentum weakens further, the full-year growth target of 4.5%-5.0% will come under greater pressure.

What to watch

• Monitor whether the remaining government bond quota, expected to amount to approximately 3% of GDP before year-end, can be deployed more rapidly.
• Monitor the deployment of the RMB800 billion in policy bank instruments and the pace at which it translates into physical work completed.
• Monitor whether fiscal deposits decline and whether budget expenditure growth can catch up toward the full-year target of 4.4%.
• Monitor whether the contraction in land sale revenue and government-managed fund revenue and expenditure continues to moderate.
• Monitor whether near-term growth momentum and pressure on the full-year growth target of 4.5%-5.0% trigger the second phase of additional support.