SCIO briefing on China's fiscal and monetary policies

Speakers:

Liu Wei, vice minister of the Ministry of Finance

Wang Jianfan, director-general of Tax Policy Department, Ministry of Finance

Wang Kebing, vice director-general of Budget Department, Ministry of Finance

Chairperson:

Xi Yanchun, vice director-general of the Press Bureau, State Council Information Office

Date:

July 28, 2017

Xi Yanchun:

Ladies and gentlemen, good afternoon. Welcome to today’s press conference. We are delighted to invite Mr. Liu Wei, vice minister of finance, to introduce China’s fiscal and monetary policies and answer some of your questions. Also present are Mr. Wang Jianfan, director-general of the Tax Policy Department of the ministry, and Mr. Wang Kebing, vice director-general of the Budget Department of the ministry.

Now, let’s welcome Mr. Liu Wei to provide his briefing.

Liu Wei:

Ladies and gentlemen, good afternoon.

In the past six months, the Ministry of Finance has concentrated on supply-side structural reform, and launched a proactive fiscal policy, ensuring China’s economic performance would remain stable and would move in a positive direction.

First, Stepped-up efforts to cut taxes and fees.

We continued to ease the corporate tax burden. Measures taken included: implementing and improving the program to replace business tax with VAT in all sectors of society; simplifying the structure of VAT rates; halving corporate income tax for an increasing number of small and micro businesses; providing tax credit policies to more enterprises investing in business start-ups; widening the scope of tax deductions for R&D expenses of high-tech small and medium-sized enterprises.

We also made more efforts to cut fees. Measures taken included: overhauling and exercising standard-based management of administrative fees and government-managed funds; releasing the lists of administrative charges of central and provincial governments on the website of the Ministry of Finance; launching short-term policies to lower premiums for unemployment, reduce logistics and energy consumption costs of enterprises, and reduce business and service fees and charges.

These policies and measures are expected to save enterprises 1 trillion yuan in taxes and fees this year.

Second, Improving management of budget implementation.

Regarding central government’s transfer payments to local governments, by the end of June, we had carried out most of the appropriations to local governments, while the remaining funds are for special items, such as payments to those needing settlement by actual spending.

We deepened reforms to introduce a system for the treasury's centralized revenue collection and expenditure payments. Government funds, allocated and transferred in a timely way were also put to better use.

We speeded up the process of making budgetary funds available for fiscal expenditures. In the first half of this year, the growth rate of national fiscal expenditure was six percentage points higher than fiscal revenues. The proportion of budgetary expenditures implemented was 0.7 percentage points higher than the same period last year.

We improved performance-based budget management. Besides the general public budget, some government-managed funds and State capital operations were also placed under closer supervision.

Liu Wei:

Third, improved people's living standards.

Precise measures are being launched to alleviate or eliminate the prevailing impoverished conditions, with special attention being paid to the most affected areas. Funds for the agricultural sector have expanded from the pilot poverty-stricken counties to the entire impoverished area and local government attempts to alleviate poverty by asset incomes are being buttressed.We have unified policies whereby Chinese students receiving compulsory education are exempted from paying tuition and fees and paying for textbooks and a subsidy will be provided for the living expenses of students from families with financial difficulties, so that the exemptions can be deemed valid everywhere.

Funds for the needy group have been better integrated and the local governments are expected to better assist people with minimum incomes or those suffering severe poverty. Meanwhile, more efforts have gone into healthcare and great importance been placed on efforts to protect the air, water and soil from pollution through programs of ecological conservation.

The government has placed more importance on the most impoverished areas where the shortage of resources and energies leads to fiscal difficulties.

Fourth, tightened control of local government debt.

The fundraising programs by local governments have been further regulated. There are clear guidelines for the issuance of local government bonds. We have improved the system for local governments' special debt and a mechanism in response to risks and emergencies has been established. At the same time, a regular institution overseeing local governments' debts has also be established.

In the past few months, the joint efforts of macro-economic policies, such as fiscal policy, have ensured the sound and smooth development of the national economy and the execution of fiscal budgets has also performed well.

During the first half of this year, the National General Public Budget Revenue hit 9.4 trillion yuan, up 9.8 percent year on year--an increase of2.7 percentage points compared to the same period last year and 5.3 percentage points higher compared to the figure of last year's total. By slashing considerable amount of taxes and fees, revenue during the past six months surged above expectations, which demonstrates the sound and positive development of the national economy. The improved economic structure, the resurgence of the service industry, the positive balance sheet of enterprises and the growing imports and exports have laid a good foundation for increased revenue. At the same time, the growth also partly resulted from the rise of the producer price index (PPI) as well as the price hike of bulk commodities.

The structure of the revenue has changed positively. During the first half of this year, tax revenue growth constituting 92.9 percent of the entire increase, 13.3 percentage points higher compared to the figure of last year's total. The value-added taxes, including industrial and commercial VAT, enterprise and personal income taxes and taxes on imports, maintained double-digit growth. The secondary and tertiary sectors,accounting for 47.5 percent and 52.3 percent respectively, have contributed considerably to the growth of tax revenues.

Considering the tax growth of different sectors, the reduction of excessive capacities, supply-demand reform and the surging prices of products led to tax increases in the energy and raw material industries; the constant driving force of the improved industrial structure produced an increase of taxes from medium or high-end manufacturing industries and the shift of growth drivers and emergence of the new market demand brought about the rapid tax growth in cultural, sports, the internet and IT sectors. In regard to regional economies, the growth basically can be seen in balance, with 11.3 percent and 10.7 percent respectively in the middle and western areas and 9.3 percent in the east.

In the first half of this year, the National General Public Budget Expenditure hit 10 trillion, constituting 53.1 percent of the planned budget, and registering growth of 15.8 percent year-on-year. The growth rates of education, science and technology, social security and employment, healthcare and family planning and energy saving and environmental protection were respectively 17.2 percent, 22.7 percent, 24.6 percent, 18.2 percent and 39.8 percent.

The Ministry of Finance, in the following phase, will continue to comply with the strategic policy decisions made by the CPC Central Committee and the State Council, uphold the consistency and coherence of the policies, implement proactive and effective fiscal policies, fend off the risks of local government debts generally guided by the supply-side reform, curb the growth of hidden debts and ensure the sound and stable development of national economy.

I will conclude my report here and move onto the question-and-answer session with my colleagues. Thank you.

Xi Yanchun:

Thank Mr. Liu Wei for his introduction. Now, the floor is open to questions.

Phoenix TV: 

We have noticed that the recent National Conference on Financial Work demanded local government debts be strictly controlled. A lifelong accountability system and a system to retrospectively hold officials accountable for their erroneous acts were to be implemented. At a meeting of the Political Bureau of the CPC Central Committee, a warning was issued about local government debts and improvements were sought in a mechanism for local governments to secure financing so as to contain hidden debt-related risks of local governments. From this point of view, what is your opinion, and how will you implement the central government’s requirements?

Liu Wei:

The question you have raised is one that all sectors of society have been paying close attention to. At the meeting of the National Conference on Financial Work, President Xi Jinping laid down new and higher requirements. The CPC Central Committee and the State Council have placed emphasis on preventing and reducing risks of local government debts. In recent years, the Ministry of Finance has strengthened top-level planning, promoted institutional set-up and formed a “closed cycle” system for local government debt management and supervision. Let me introduce the work in detail. 

 First, setting ceilings on local government debts. It is known that ceilings on local government debts should be examined and approved by the National People's Congress. And the ceilings on government debts are determined through certain procedure for each province, and it is not allowed to break through.

Second, bringing local government debt under budgetary management. It means that new debts must be included in budget and under the examination and supervision of the National People’s Congress. Local governments cannot freely increase their debts at will.

Third, issuing new local government bonds. Local governments can issue bonds within the statutory limit in a legal and regulated way. The amount of bonds to be issued by local governments should be decided in accordance with their ability of debt repayment and their needs of financing.

Liu Wei:

Fourth, issue local government bonds in swaps with government debt. The previously mentioned newly-issued bond in the budget under central government guidance is the increment, which would be controlled in the new increased quota. But what should we do with the stock of local government debts already existing? Those debts were gradually replaced by issuing local government bonds, which will lower the entire cost of debt.

Fifth, improve local government's special debt management abilities. We are promoting special and particular bond management methods, strengthening the management of special debts related to local government's funded income and local assets (e.g. land assets).

Sixth, establish a risk pre-warning and emergency response mechanism. The Ministry of Finance has established approaches for achieving risk pre-warning and emergency response, asking local governments to evaluate the risks based on the total amount of debts and the debt structure. This involves very precise system design.

Seventh, we built a system of regular supervision of local government debt. Besides audit supervision, the Financial Supervision Commissioner's Office of the Ministry of Finance also exercises routine supervision on the debt of local governments according to law, which is also their major task. Somecity or county-level governments under theearly warning, and financing platforms with non-standard operation have also been placed under surveillance. We have taken a series of measures to strengthen daily supervision of local government debt.

Eighth, we will resolutely stop such action as financing guarantee in violation of the relevant law and regulations. Media friends may notice that, in regard to those illegal behaviors, local governments are not only required to take corrective steps, but also are held fully accountable for their actions.

With the gradual implementation of the measures, it can be said we have achieved remarkable success in controlling risks of local government debt, and we are fully capable of defending the bottom line, namely no outbreak of systemic risk. By the end of last year, local governments' outstanding debt stood at 15.32 trillion yuan, within the quota of 17.19 trillion yuan approved by the National People's Congress. If assessing the level of local government by measure of the debt ratio, it was 80.5 percent in 2016, which stayed below the international standard.

Adding in the outstanding central government debt of 12.01 trillion yuan included in budget management, the outstanding government debt nationwide stands at 27.33 trillion yuan. Calculated in accordance with GDP preliminary accounting of 74.41 trillion yuan released by the National Bureau of Statistics, the government debt ratio stood at 36.7 percent. This figure is lower than the European Union's warning line - 60 percent - and it is also lower than the level of major market-economy countries and emerging markets. In regard to government debt risk, we think it is generally controllable, which is our rational and confident answer.

As approved by the fifth session of the 12th National People's Congress this year, the debt limit for local governments in 2017 is 18.82 trillion yuan. At the end of June, with the issue of more bonds, the current debt balance of local governments is 15.86 trillion yuan, still under the limit of 18.82 trillion yuan. China's National Financial Work Conference and the meeting of the Political Bureau of the Central Committee of Communist Party of China have made special arrangements and specified requirements on controlling local debt levels and prevent risk, and the Ministry of Finance will carry out the implementation in a clear and resolute way. We will further implement the new concepts of development, and adhere to supply-side structural reform as the main effort, resolve accumulated local debtrisk in an active and prudent way, and regulate the debt financing of all local governments.