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Chap05_PRC

Chap05_PRC

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Published by: owltbig on Dec 21, 2010
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5Peoples Republic of China
 Zhang Mingli and Hui Liu
 I.iscal Policy and Management 
In the Peoples Republic of China (PRC), scal policy has threeobjectives:(i)
Channel social resources
to the departments that the Governmentwants to support. This includes the transfer of capital to the state-owned enterprises (SOEs) as well as the nancing of publicexpenditure.(ii)
 Income distribution
This function uses tools such as subsidies tomaintain the states stability. This important function is done byprotecting groups such as workers and peasants.(iii)
Stabilizing uctuations of the economic cycle
In the short term,this is realized by adjustment of aggregate demand, and in thelong term by adjustment of aggregate supply. The PRC has recentlybeen forced to change its policy of weak nance, strong banks,making debt policy an important ingredient of positive scal policy.Expenditure and revenue have increased steadily due to rapid eco-nomic growth, with scal revenue increasing by 5.3 times between 1985and 1998, and scal expenditure by ve times.Meanwhile, scal decit increased at a di¬erent pace. Before 1994,the budget included the income and expenditures of government bonds,and debt issuance was regarded as a source of scal income. Thereforethe decit was not very high, although it increased year by year. Since1994, the scal budget has not included income and expenditure of government debt, and the Ministry of inance (MO) has not been al-lowed to overdraw from the Central Bank. iscal decit leaped to morethan Y50 billion in 1997, and to more than Y90 billion in 1998 becauseof the positive scal policy introduced after the Asian nancial crisis.Although the absolute amount of scal revenue/expenditure is in-creasing steadily, the relative proportion to gross domestic product (GDP)
 
142
Government Bond Market Development in Asia
is falling as a result of fast economic development and a governmentaltax system, which is not comprehensive. The lessen taxes-add subsidiespolicy, designed to support the reform of state-owned enterprises (SOEs)is another important factor.
TABLE 1.iscal Revenue and Expenditure as Percentage of GDP
Yeariscal Revenueiscal Expenditure198222.9023.23198323.0323.75198422.9123.72198522.3622.36198620.8021.61198718.3918.91198815.7916.69198915.7616.70199015.8416.63199114.5715.67199213.0814.05199312.5613.40199411.1612.39199510.6711.67199610.9111.69199711.6212.40199812.4413.60
Source
:
China Statistical Yearbook 1999
.
Central nance in the PRC is rather weak. While the central Gov-ernment has a relatively stable proportion of overall government revenue,there is a clear downward trend. Meanwhile, the level of its expenditureis rising. In 1994, the ratio of central government expenses to overallgovernment expenditure leaped from 22.02 percent in 1993 to 55.70percent.Subsidies to loss-making SOEs are not viewed as expense itemsbut rather as revenue items, so the growth of subsidies in fact does notincrease the Governments expenditure, but rather reduces revenue. Thereis no special mechanism to restrain this except indirect decit pressure.
 AGovernment Revenue and Expenditure
Government revenue in PRC is classied as follows: (i) budgetrevenue; (ii) extrabudgetary revenue, and (iii) extrasupervision revenue.The biggest source of budgetary income is the taxes and prot
 
Peoples Republic of China
143
605040302010085 87Central GovernmentRevenueCentral GovernmentExpenditure88 90 91 93 94 96 97
   P  e  r  c  e  n   t
Year
earned by SOEs. Statistics show that more than 60 percent of govern-ment income comes from SOEs. In recent years, however, SOEs havebecome decreasingly protable and increasingly subsidized, weakeningthe basis of government income, and making the Government ever moredependent on debt issuance. Under conditions of high repayment andissuance costs, debt issue will demand larger repayment in the future,creating a cycle of larger and larger debt issuance.Extrabudgetary revenue is not planned in the central Governmentsannual budget, but is controlled by local governments or departments,respectively.Extrasupervision revenue is controlled by policy performers inwardly.It is outside the system of government revenue, and is usually used toprovide for the welfare of small groups, such as peasants or farmers.The proportion of budgetary revenue has been gradually decreas-ing, while extrasupervision revenue has become larger and larger, withmuch income raised by subordinate authorities in the form of fees orcharges. This has weakened the Governments scal power, and oftencreates policy dilemmas. Weak budget nance means central Govern-ment must depend more on debt issuance, but at the same time it addsto the burden on central Government, often meaning it cannot support
Source
:
China Statistical Yearbook 1999
.
.IGURE 1Central Government Revenue and Expenditure
(percentage of GDP)

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