The Financial Situation in China: Issues and Challenges

Naito Jiro
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Naito Jiro: Daito Bunka University

Public Policy Review, 2020, vol. 16, issue 3, 1-29

Abstract: In the Chinese economy, whose growth is gradually slowing down, it is necessary to promote structural reform, which is an important policy challenge, and implement measures to stimulate the economy for the immediate moment at the same time. The contents and direction of fiscal policy are of great concern. As for the fiscal position, it cannot be said at the moment that fiscal risk is extremely high when we take a comprehensive look at the budget balance situation and debt problems. However, pressure on the fiscal position is gradually growing. As China is currently shifting its fiscal policy emphasis to economic stimulus measures, such as large-scale tax reduction and expansion of public investments, there are concerns that the structural reform may stall. Although the fiscal relationship between the central and local governments has undergone several adjustments since the introduction of the tax-sharing system, there are still some unresolved issues. In particular, the mutual dependence between governments, financial institutions and companies at the local level are aggravating regional debt problems. When we consider China’s fiscal policy, the lack of transparency over the fiscal position is also posing a significant risk. In this respect, the results of a survey conducted by a research group at Shanghai University of Finance and Economics are very interesting. The group pointed out that although disclosure of fiscal data is gradually improving, many problems remain. It is necessary to reform the government-market relationship, which has been a pending challenge. Getting over the situation of guo jin min tui (the state advances as the private sector retreats) by promoting the reform of state-owned enterprises is also important for maintaining fiscal sustainability. At the same time, it is essential to clarify the division of administrative work and roles, authorities, responsibilities, and resource allocations between the central and local governments and between local governments. There is no doubt that social security expenditure will increase steeply as the aging of society with a low birthrate advances rapidly in the future. In addition, as China is implementing new urbanization measures intended to achieve a balanced national development and resolve inequality, it is inevitable that the pressure on the fiscal position will grow further in the near future. It is very important to minimize future fiscal risks by promoting the structural reform while China has sufficient fiscal capacity and before the aging advances further.

Keywords: fiscal situation; inter-governmental fiscal relationship; fiscal sustainability (search for similar items in EconPapers)
JEL-codes: H1 H6 H7 O2 (search for similar items in EconPapers)
Date: 2020
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