China's budget deficit widens 600% as Covid-19 pandemic cuts revenue

China’s broad budget deficit in the first six months of the year widened to a record as government spending climbed and falling land sales and tax cuts cut income.  

The deficit in the budgets for all levels of government was 5.1 trillion yuan ($758 billion), according to Bloomberg calculations based on data from the Ministry of Finance released Thursday. That was the highest ever for the first half period and compares with a shortfall of just 718 billion yuan in the first half of last year and a gap of 3.4 trillion yuan at the same point in 2020.

China’s finances have been squeezed this year as its worst Covid wave in more than two years and restrictions imposed to contain the outbreaks curbed economic growth and tax income, while putting extra burdens on local governments to spend more to pay for virus testing and controls. Revenue has also been impacted by a tax relief plan to shore up the economy and a struggling real-estate market, which caused land sales to plummet.

The government recorded a combined 13.3 trillion yuan in general public and government fund income in January-June. General public revenue fell 10.2 per cent from a year earlier, but would have risen 3.3 per cent had it not been for the tax rebates, the ministry said. 

The government had planned 1.64 trillion yuan worth of additional tax refunds to companies this year, but has actually returned 1.85 trillion yuan in the first six months, MOF officials said Thursday. That means the impact of the program on government income will likely taper off in coming months. 

Government spending continued to rise. Total spending was 18.4 trillion yuan, while general fiscal expenditure, which includes things like education, healthcare, defense and scientific research, was up 5.9 per cent to 12.9 trillion yuan.

Revenue from the sale of land dropped 31.4 per cent on year in the first six months of 2022 to 2.4 trillion yuan.

Infrastructure push

China is making 7.2 trillion yuan ($1.1 trillion) in funds available for infrastructure spending, a decisive shift away from a focus on controlling debt toward supporting a lockdown-ravaged economy.

The figure refers to government-backed funds and is based on Bloomberg News’analysis of official announcements. It includes an unprecedented 1.5 trillion yuan of “special” bonds, mainly used for infrastructure, that local governments may be allowed to sell in the second half of this year, according to people with knowledge of the discussions. 

With the government expanding its funding support, infrastructure investment in 2022 will likely rise 7.7 per cent from last year, according to Citigroup. That would be a major boost to the world’s second-largest economy as Beijing tries to offset the drag from re­peated Covid lockdowns and a slump in the property market. 

“We have entered a new cycle of infrastructure development,” said Yu Xiangrong, chief China economist at Citigroup. “That’ll be a new normal.” 

He estimates overall growth in fixed-asset investment will reach around 6 per cent this year, which would contribute 2 percentage points to China’s gross domestic product growth. “The tendency of shifting away from infrastructure investment due to the deleveraging campaign has come to an end,” he added.

Regulatory crackdown

Alibaba Group is cutting over a third of staff in its in-house deals team, four people with knowledge of the matter said, after Beijing’s sweeping regulatory crackdown sharply slowed the Chinese e-commerce behemoth’s dealmaking pace.

Alibaba plans to reduce its strategic investment team of more than 110 people, mainly based in mainland China, to about 70, said two of the people, adding the company has already informed a bulk of staffers of their redundancy.

The job cuts mainly involve mid-level and senior people in the mainland, said the two people, declining to be named as they were not authorised to speak to the media. The company’s deals team also has staff in Hong Kong, they added.

Alibaba did not immediately respond to a request for comment.

In the red 
 

• The 718 billion yuan deficit is the highest ever for the first—half period 
• General public revenue fell 10.2% from a year earlier
• The government had planned 1.64 trillion yuan worth of additional tax refunds to companies this year, but has actually returned 1.85 trillion yuan in the first six months
• Revenue from the sale of land dropped 31.4% on-year in the first six months of 2022 to 2.4 trillion yuan