China posts record deficit in 2022 on Covid Zero, property slump

CHINA’S budget deficit jumped to a record 8.96 trillion yuan (S$1.7 trillion) last year, showing the strain put on local government finances by the spending needed to implement and offset its ultimately futile zero-Covid policy.

The deficit was larger than the previous record of 8.72 trillion yuan in 2020, when the economy was battered by the initial outbreak of Covid-19. It was also 51 per cent higher than in 2021, according to Bloomberg calculations of data from the Chinese Ministry of Finance (MOF).

It was worth about 7.4 per cent of China’s nominal gross domestic product (GDP). This was higher than the previous year’s percentage, but lower than the record 8.6 per cent in 2020.

In 2022, the Chinese government’s finances deteriorated sharply as economic growth slowed to the second-weakest rate since the 1970s. Things were complicated by a property slump, weakening global demand, and the “Covid Zero” policy, which severely damaged economic activity. Local administrations were forced to pay hundreds of billions of yuan for tests, quarantines and lockdowns used to enforce the policy. Those costs rose through the year, until the government abandoned all control measures abruptly in early December.

The deficit has left local governments in an increasingly poor fiscal position, and the central government could become reluctant to support the economy with fiscal spending after last year’s growth slump.

Government spending was the key driver of China’s 3 per cent economic growth last year, due to a huge infrastructure stimulus that increased investment and spending on services. This boosted consumption, even as spending by households fell. Tax revenue also fell, after the government offered tax rebates to help businesses survive, with the MOF calling the returns “the biggest ever”.

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The government’s income from land sales was slashed to just 6.69 trillion yuan in 2022, amid the worsening property slump. This was the lowest annual take since 2018. December land sales revenue fell 19 per cent year on year to 1.57 trillion yuan, extending double-digit drops seen nearly every other month in the year.

Net of land sale costs, local governments made just 312 billion yuan from last year’s sales; this was two-thirds less than in 2021. Revenue from deed taxes slid 22 per cent from 2021.

The cost of Covid controls in China’s cities and provinces has become clearer with the publication of their budget figures. Guangdong spent more than 71 billion yuan on the measures in 2022. This was barely under the 76 billion yuan it spent in the previous two years combined, and over 5 per cent of its general public income for the year.

Beijing’s government, meanwhile, said it spent almost 30 billion yuan last year for vaccines, testing, quarantines, and other related expenditure. This was more than 5 per cent of the city’s general public revenue. Its deficit blew out by 55 per cent in 2022 to 144 billion yuan.

Over in Shanghai, which underwent a wrenching two-month lockdown early in the year, the deficit was 171 per cent larger than in 2021. In Fujian, where the outbreaks were less severe, authorities spent 13 billion yuan on Covid-related measures.

The fiscal squeeze may continue this year, as the real estate sector has yet to show any signs of bottoming out. At the same time, there is a wall of local bonds maturing. This is expected to constrain the authorities’ ability to bolster economic growth. Analysts widely expect growth in 2023 to mainly rely instead on a rebound in consumption, as government-led infrastructure investment slows.

Total income from the general public and government fund budgets was 28.2 trillion yuan in 2022, down 6.3 per cent from a year earlier. General public revenue alone, which captures tax income, edged up 0.6 per cent year on year. It would have risen 9.1 per cent had it not been for tax rebates, the MOF said.

Total government spending from the general public and government fund budgets was 37.1 trillion yuan, up 3.1 per cent from 2021. BLOOMBERG