Current Fiscal Situation and Reform in China

1
Current Fiscal Situation and Reform in China

• YUAN Guangrui
• Deputy Director-General Administrative
  Department
• Ministry of Finance, PRC May 26, 2005

2
Current Fiscal Situation and Reform in China

1. Mechanism of stably increased fiscal income has
   initially been formed
2. Building up of public finance system has gained
   substantial progress
3. The macro-economy-management effect of financial
   policy is evidently strengthened.
4. Next step of the fiscal reform

3
System of tax distribution in fiscal mechanism

• The evolution of system of tax distribution
• The fiscal management system of traditional plan
  economy centralized revenue collection and
  centralized fiscal transfers.
• China began the reform in fiscal contract system
  during the economic transitional period.
• China carried on tax assignment system and
  different-level management system which are
  universally approved since 1994

4

• Different-level management system whereby tax
  revenues are shared by central and local
  authorities
• Clarification of expending responsibility between
  the central and the local
• Central finance mainly takes responsibility for
  the costs of national security, diplomacy and
  central government operation, regulates the
  structure of national economy, coordinates local
  development, carries on the necessary expense of
  macro-control, and social development expense
  controlled by the central.
• Local finance mainly takes responsibility for the
  expense needed by the local government operation
  and cost of local economic and social development.

5

• Separate the central revenue from the local
  revenue
• The central fixed revenue includes tariff,
  value-added tax from import, consumption tax,
  income tax from the central enterprises and the
  non-bank financial enterprises, and the profit
  tax from the central enterprises.
• The local fixed income includes business tax,
  income tax payable and profit tax from the local
  enterprises, individual income tax, tenure tax
  payable, and direction-adjustment tax of fixed
  capital investment.
• The income shared by the central and the local
  value-added tax, resource tax, and stock-exchange
  stamp tax.

6
System of fiscal transfer payment in governments

• The tax assignment system in 1995\4 regulated the
  amount and form of fiscal transfer payment in
  governments, and emphasized the build of
  tax-return system (some tax revenue collected by
  the central government has been transferred back
  to local)
• Since 1995, system of fiscal transfer payment in
  transitional period was built, and standard
  concept of fiscal income and outcome was applied.
• Since 2000, central government set transfer
  payment in minority areas in order to settle
  special problems there
• Since 2002, transfer payment in transitional
  period was renamed as general transfer payment.
• At present, a kind of relatively standard
  inner-government transfer payment has been
  formed, including tax return, financial and
  special transfer payment targeted equality and
  balance.

7
Reform of tax system

• Important reform of tax system in 1994
• A new turnover tax system which takes value-added
  tax as its core with consumption and sales tax as
  its supplement has been established
• Income tax payable of state-owned enterprises is
  unified
• A unified individual income tax is established

8

• Other Tax Reforms
• the scope of resources tax was expanded, and its
  tax burden is adjusted. The salt tax was included
  in resources tax.
• VAT is levied on the use of land, to control the
  margin profit of the real estate sales.
• Some minor taxes were stopped, e.g. taxes on
  market trading, cattle trading, special tax on
  the use of oil, tax on bonus and salary
  adjustment.
• Special consumption tax was included in
  consumption tax categories, and the
  administration of the taxes on livestock and
  banquet was delegated.

9

• Efforts are continued to improve tax system
• Individual income tax on personal deposit
  interests was resumed.
• The tax for adjusting the direction of
  fixed-asset investment was stopped temporarily.
• The business tax rate for the finance and
  insurance sector was reduced from 8 percent to 5
  percent in three years.
• After a few reductions, the stamp tax rate on
  stock exchange transactions was cut down to 1
• The tax on automobile purchase replaced the fee
  on such purchase.
• The tax and fee reform in rural areas were
  carried on, and the agricultural tax would be
  scrapped
• Tariff rate continued to reduce to fulfill
  Chinas WTO commitments.
• The export rebate system was reformed last year,
  with the rebate rate cut down by 3 percentage
  points.

10
Current Fiscal Situation and Reform in China

1. Mechanism of stably increased fiscal income has
   initially formed
2. Build up of public finance system has made
   substantial strides
3. Fiscal policy has been effective in term of
   macro-control.
4. Next step of the fiscal reform

11
Unit budget-making continued to be reformed

• Unit budget-making
• The reform of unit budget-making was started in
  1999.
• In 2000, all central units made their unit
  budget, which included basic spending budget and
  project spending budget. 4 unit budgets were
  selected and reviewed by the National Peoples
  Congress.
• In 2003, the pilot reform on basic spending and
  fixed number of person and fixed quota system
  was expanded to 118 secondary quasi-government
  agencies?
• In 2004, 5 central units were selected for the
  pilot reform of fixed quota of materials
  expenditure, and the time for budget-making was
  extended to 8 months.

12

• The reform of category of government income
  and spending
• In 2001, the category of budgetary spending was
  improved according to economic classification.
• In 2002, the 12 categories of budgetary spending
  were increased to 44 categories.
• In 2003, The plan for Reform of Category of
  Government Income and Spending was completed, and
  the new system consisted of income categories,
  functional spending categories and economic
  spending categories.
• In 2004, top categories and items under
  functional spending categories were adjusted to
  reflect the functional activities of the
  government agencies in a more detailed manner.
  State Development Planning Commission, Ministry
  of Commerce,Ministry of Water Resources,Ministry
  of Science and Technology made their budget of
  2004 using the new categories.

13

• Reforming the administration of separately
  managing the revenue and expenditure
• In 2002, 15 central units were selected for pilot
  reform of the collection of non-tax revenue. By
  the end of 2003, 35 central units and 26
  provinces had implemented the pilot reform.
• In 2004, more than 7 central units joined the
  pilot reform, and 62 fees collected by 26 units
  were included in the budget management.

14
The reform of centralized treasury revenue and
payment progressed steadily

• The reform of centralized treasury payment
• The reform of centralized treasury payment was
  started in 2000. by the end of 2003, 80 central
  government agencies had joined the reform, and in
  2004 60 more joined.
• By the end of 2004, 140 out of 160 central
  government budget-making units and more than 2600
  local ones joined the reform. Over RMB 250
  billion on budget were involved in this reform.

15

• The reform of treasury income management
• From 2002, 35 central government agencies joined
  the reform by three steps, whose non-tax income
  is transferred directly to the fiscal account.
• By the end of 2004, 47 out of 60 central
  government agencies who has non-tax income had
  joined the reform.

16

• Advancing reform in local governments
• 30 provinces, over 1500 provincial government
  agencies and over 6000 lower level agencies have
  joined the reform of centralized treasury
  payment.
• Over 150 local government agencies (lower than
  provincial level) joined the reform of
  centralized treasury payment.
• 10 provinces are carrying out their reforms on
  non-tax revenue.

17
Deepening reform on government procurement system

• The government procurement system expanded
  rapidly
• in 1996, the pilot reform of government
  procurement system was started in some provinces.
• The promulgation of Law of Government Procurement
  on 1 Jan, 2003 marked the full implementation of
  the government procurement system.
• The government procurement system now covers
  county and municipal governments.

18

• The scope and amount of government procurement
  increased
• The scope of government procurement expanded from
  commodities to construction projects and
  services.
• The amount also increased, from RMB 13 billion in
  1999, RMB 65.3 billion in 2001, RMB 150 billion
  in 2003, to over RMB 200 billion in 2004.

19

• More healthy management of government
  procurement
• Execution is separated from the management system
  of government procurement. By the end of 2004, 26
  out of 36 provinces and cities in plan had had
  separated execution bodies from the management
  bodies. Such separation plans are being studied
  and outlined in other local governments.
• The procurements are more transparent and fair.
  In 2004, more than 60 percent of the procurement
  was achieved through open bidding, and over 70
  percent of all procurements were centralized
  ones. Spending was saved by about 10 percent in
  doing so.

20
The fiscal structural reform progressed steadily

• The function of public finance was adjusted.
  Direct investments in the competitive sectors
  were reduced, and spending in the public sectors
  were secured.
• The structure of spending was optimized. Spending
  on public security, technology advancement,
  education, agriculture and social welfare were
  increased. Less and less public finance is
  involved in the fields of manufacture or
  business, reflecting the characteristic of public
  finance.

21
Current Fiscal Situation and Reform in China

1. Mechanism of stably increased fiscal income has
   initially formed
2. Build up of public finance system has made
   substantial strides
3. Fiscal policy has been effective in term of
   macro-control.
4. Next step of the fiscal reform

22
I. From1993 to 1997 Moderately tight fiscal
policy

• The excessive economic growth in 1993
• Excessive monetary supply with financial
  instability From January to June 23, the net
  issuance of RMB amounted to 58.5 billion, an
  increase of 53.2 billion on year ago.
• Both investment and consumption boosted from Jan
  to May, investment by SOE in fixed-asset
  increased by 69.3 percent on year ago the banks
  cash disbursement for personal remuneration and
  other personal businesses increased by 36.4
  percent the administrative units overhead cost
  in cash increased by 89.4 percent. These
  indicators all exceeded the economic growth by
  far.
• More constraints caused by lack of
  infrastructures and industrial production the
  railways then was only able to meet 30 percent to
  40 percent of the total need for railway
  transportation. the price of steel, cement and
  timber hiked due to excessive demand.
• Inflation accelerated from Oct last year, the
  growth of consumer price increased on a monthly
  basis, exceeding 10 percent in March and reaching
  12.5 percent in May. In the first five months,
  the raw material price index increased by 43
  percent.

23

• Moderately tight fiscal policy
• Holding down the fiscal deficit by moderately
  cutting down the spending, controlling investment
  in fixed asset and the purchasing power of
  groups.
• To reform the tax system, tax rates and
  structures were adjusted, and the tax deductions
  and exemptions were under strictly control, and
  the expired preferential tax policies were
  terminated without extensions.
• Divided tax collection system was implemented, to
  increase tax income.
• A tighter fiscal regulation and administration,
  esp. on the fund out of budget.
• Supporting the reform of exchange rate,
  implementing a regulated, single floating
  exchange rate based on market demand. Improving
  the export rebate system to boost export.

24

• Moderately tight fiscal policy effective
• A soft landing of the national economy in 1996,
  a 9.6 percent GDP growth, retail price index up
  by 6.1 percent.
• A 8.8 percent GDP growth in 1997, retail price
  index up by 0.8 percent, a lower price growth
  rate than the economic growth rate as expected in
  the Ninth Five Year Plan.

25
II. Pro-Active Fiscal Policy Since 1998

• In 1998, the Chinese economy was affected by
  the Asian financial crisis
• The increase of outside demand was slowing down
  In the first quarter of 1998, the exports
  increased 12.8. Since then, the speed of
  increasing is slowing down. The increase in
  April, May and June is 7.9,-1.5 and 1.6
  respectively. The increase in the first half of
  the year was only 7.6,falling 18.6 than the
  same period last year.
• The speed of economic growth was slowing down
  both the consumer demand and invest demand were
  all sluggish, the GDP growth of the first half
  year was 7, falling 2.5 than the same period
  last year.
• Trend of deflationthe CPI has been negative
  since October, 1997. In the first half year in
  1998, the CPI was falling 2.1 than the same
  period last year.

26

• proactive Fiscal Policy Measures
• Issuance of long-term construction treasury
  bonds, and pushing up the social investment
  from 1998 to 2004, the accumulated issuance mount
  was 910 billion RMB,mainly invested to
  infrastructure and technical innovation. In 2003,
  the investment from the private sector was
  stimulated successfully.
• Adjusting the tax policy, and pushing up the
  demandFor the domestic equipments investment in
  the technical innovation projects according with
  the industrial policy, 40 of the investment
  domestic equipment may be credited from the
  annual increased parts of the enterprise income
  tax. To encourage the foreign and domestic
  investment, imported equipments may be exempted
  from custom tax and value-added tax . The fixed
  assets investment direction tax was abolished.
  The individual income tax of saving deposit
  interest was resumed, and the tax refund rate for
  export was increased several times.

27

• Adjusting income distribution policy, and
  improving the consumers expectationadjusting the
  wages of employees in the government agencies
  four times, setting up allowance system for those
  working in the poor region, and doubling the
  bonus by the end of each year for employees in
  the government agencies. The average wages per
  month for employees in public sector almost
  double. At the same time, the social security
  payout also increased. In 1998, the payout for
  those unemployment used for their basic living
  expenditure, endowment insurance subsidy, and low
  income subsidy were 12.3 billion RMB. This figure
  increased as 107.86 billion RMB in 2004, 7.8
  times as the year before.
• Formalizing the administrative charge system,
  lessening the social burden from 1998 to 2003,
  there were 1805 administrative charge items were
  cancelled, thus the social burden were lessened
  141.7 billion RMB. At the same time, the reform
  of rural tax and charge was also deepening and
  formalizing. The burden of farmers lessened for
  the farmers was above 30.

28

• Great Achievements of proactive fiscal policy
• The economic growth was pulled up 1 to 2 percent
  per year. This made the GDP growth stabilize
  between 7to 9 each year.
• The Chinese economy was walking out of the
  deflation shadow. In 2003, the CPI increased 1.2
  than last year.

29

• Since the second half year in 2003, the has been
  over-heating in some area
• The supply and demand of food was straining
• Sharp increase of fixed assets investment
• Too much increase of loan
• Supply of coal, electricity and oil was scarce
• The price was keeping upward
• Bubble showed in assets prices
• Huge deficit emerged in foreign trade

30

• In 2004, the extent and emphasis of active
  fiscal policy were adjusted
• the support of agriculture, rural areas and
  farmers was increased
• The implementation of two tax reductions, and
  three subsidies spent the central government 45
  billion RMB
• The expenditure of controlling bird flu was 8.48
  hundreds million RMB. A series of supporting
  policies relating to tax and charges reduction,
  funds and subsidies were implemented.
• Government bonds used for agriculture was 38
  billion RMB, accounts for 34.5 in the total
  increment of government bonds this year.
• Increasing the agricultural integrated developing
  expenditure, implementing the lowest purchasing
  price for food. The expenditure for education,
  sanitation, and culture was also increased,
  mainly being used in rural area. Keeping the
  price of agricultural materials stable, and
  supporting the training for rural labor
  migration.

31

• Holding the direction and strength of fiscal
  investments appropriately
• According to the principle of five balanced
  aspects (????), the expenditure structure of
  government bonds was adjusted.
• The payout progress of government bonds and
  government investment was slowing down. This year
  the payment was 45.69 billion RMB.
• The payout structure of land transfer revenue was
  adjusted. Some of the land transfer revenue was
  used to develop the agricultural land. This
  policy controlled the expansion speed of cities
  construction effectively.

32

• Reform the export tax refund system steadily
• The 243.6 billion RMB ,that government owe for
  tax refund , has been almost paid up
• Ensuring the timely pay of new refund tax. The
  export was accelerated rapidly.

33

• Increasing the support for the employment, social
  security, and public sanitation
• Increasing the re-employment subsidies of 2. 225
  billion RMB from the central budget
• The subsidies of basic living expenditures for
  unemployment were 14.4 billion RMB
• Special transfer payment for endowment insurance
  was 52.4 billion RMB
• Supporting the pilot reform of social security
  system of cities and towns in Jilin and
  Heilongjiang province.
• Supporting the building of new rural cooperation
  medical and remedy system

34

• Support the reform of state-owned enterprises
  actively
• Arranging subsidies for bankruptcy and closedown
• Supporting the pilot reform of separate the
  social function from the enterprises, in China
  National Petroleum Corporation (CNPC),, Sinopec,
  and Dongfeng automobile company.
• Supporting national commercial banks in their the
  financial restructuring and IPO , including Bank
  of China, China Construction Bank, and Bank of
  Communication.
• Pilot reform of value-added tax in north-east
  region

35
III. Implementation of prudential fiscal policy
since 2005

• Great changes have taken place in Chinese
  economy
• the independence economic growth mechanism was
  formed primarily
• The function of market mechanism was
  strengthening obviously now the mechanism of
  supply and demand, price mechanism, and
  competition mechanism were the basic elements in
  the resource allocation. The private economy was
  the main force to push the economic growth.
• The pace of urbanization was accelerated in
  recent years, the people in Chinese town
  increased 1.4 per year. In 2003, the
  urbanization rate was 40.5,showing that China
  was in the process of the important period of
  accelerated urbanization.

36

• The upgrade of consumer structure was
  accelerating In 2003, GDP per capita in China
  was 1090 US dollars. The consumer structure was
  in the stage of transforming from eating,
  wearing and using to living, traveling and
  touring. The trend of heavy chemical industry
  was also emerging.
• Developing the opening economy further In 2004,
  the reliance of foreign trade was about 70.
  China has become the third largest trade country
  in the world. At the same time, as the main
  destination of FDI, the china outbound direct
  investment was also increased rapidly.

37

• The economic growth entered the upward stage of a
  new cycle
• The economic growth was close to the potential
  level In 2003, the GDP growth rate was 9.3. In
  2004, the growth rate was 9.5. The emergence of
  bottle-neck constrain or resource constrain
  showed that, the GDP growth has been close to the
  potential level.
• The price was upward In 2003, CPI and CRI
  increased 1.2 and -0.1 respectively than last
  year. In 2004, the two figures were 3.9 and 2.8
  respectively.
• The increase of unemployment rate was slowing
  down In 2003, the employment in cities increased
  8.59 million, and the registered unemployment
  rate in cities was 4.3. In 2004, the
  above-mentioned two figures were 9.8 million and
  4.2 respectively. The unemployment rate
  decreased 0.1 percent than the year before.
• Surplus of balance of payment In 2003, the
  foreign trade surplus was 25.5 billion US
  dollars. By the end of this year, the foreign
  reserves in China were 403.3 billion US dollars.
  In 2004, the above-mentioned two figures were 32
  billion and 609.9 billion US dollars
  respectively.

38

• Emergence of serious problems in economic
  development
• Gap enlarged in the process of development
  according to the fact of unbalanced and
  disharmony development in China, Chinese
  government brought out five balanced aspects,
  including balancing urban and rural development,
  balancing development among regions, balancing
  economic and social development, balancing
  development of man and nature, and balancing
  domestic development and opening wider to the
  outside world
• The conflict between economic growth manner and
  resource constraints was severeChinese GDP in
  2003 accounted for 4 of the whole world, but the
  resources consumption proportional to the whole
  world were as follows petroleum 7.4, coal 31,
  iron ore 30, steel 27, alumina 25,cement 40.
• The reform of economic system lagged the
  changing of government functioning was
  inadequate. The government was still involved in
  the resource allocation in competition area. The
  price mechanism in factor market was imperfect,
  thus underestimated private cost of investment
  seriously. The reform of enterprises lagged
  behind, and the budget constraint was still soft.
  There existed distortion in the enterprises
  operation.

39

• Basic contents of prudential fiscal policy
• Control of deficits decreasing the central
  fiscal deficits appropriately, keeping the
  balance of increment, with tightening and loosing
  suitably.
• Structure adjustments according to five
  balanced aspects, adjusting the structure of
  fiscal expenditure and government bonds funding
  payout
• Pushing the reform forward changing the
  traditional way of the economic growth, that
  mainly depends upon the investment from
  government bonds funding, and supporting the
  reform of economic systems and innovation of
  instruction.
• Increasing revenue and reducing expenditure
  collecting tax strictly and legally, and ensuring
  the stable growth of fiscal revenue. Strictly
  managing the fiscal expenditure, and enhancing
  the efficiency of using fund.

40
The fiscal situation and reform in China

• I?The mechanism of stable growth of fiscal
  revenue has formed preliminarily
• II?The building of public fiscal system stepping
  forward effectively
• III?The function of macro adjustment of fiscal
  policy was strengthening obviously
• IV?Basic thoughts of next step reform

41
I. Improving the fiscal management of tax
assignment system

• Improving the transfer payment manner, and
  increasing the scale of ordinary transfer.
  Optimizing the transfer payment structure, and
  improving the public service level in undeveloped
  area, to attain the goal of getting rich
  together.
• Improving the local fiscal management of tax
  assignment system, leading the provincial
  governments to bear the responsibility of
  adjusting and distributing the fiscal resources,
  and enhancing the ordinary transfer payment to
  fundamental government.
•  

42
II. Optimizing the tax system further

• Improving the enterprises income tax system
• Checking and formalizing the different tax policy
  for domestic and foreign investors, especially
  the preferential tax policy to foreign investors.
  The tax policy should be unified with no
  discrimination for ownership.
• In the process of unifying the enterprises income
  tax for domestic and foreign investors, the
  preferential tax for the foreign investors now
  could be retained temporarily for some time.
  After tax unifying totally, some preferential tax
  policies would be replaced by industrial
  preferential policies. In some areas, the
  preferential rights could be strengthened.

43

• Reform of individual income tax system
• Implementing the integrated and classified
  personal income tax system steadily. Combining
  the main income items into the integrated income,
  and adopting the progressive tax rate.
• Adjustment of the tax rate,expenses reduced, tax
  exemption ,tax collecting and administration,in
  order to bring the function of income
  distribution into play, and to minimize the gap
  of the individual income.

44

• Implementing the consumption-based VAT reform
• The production VAT did not reduce fixed assets
  investments, thus dual impose existed
• From now on, the production-based VAT would be
  changes as consumption-based VAT. There would be
  pilot reform in 8 industries in north-east
  region, including equipment manufacturing
  industry. The reform would be expanded to
  all-over the country steadily. The tax included
  in the price of the new purchase of equipments
  would be added to the reduction item of VAT.

45

• Improving the consumption tax system
• Enlarging the imposing scope. The products
  harmful to the environmental protection, and some
  luxury consumption goods should be imposed.
• According to the economic development and
  consumption structure, some products consumption
  tax rate with obvious heavy burden should be
  decreased. The rates for those products needed to
  be adjusted further should be increased, in order
  to form a more reasonable tax rate structure and
  level.

46

• Improving the tariff system
• Fulfilling the promise of entering WTO, the
  general custom rate level this year would be
  9.9, compared with 10.4 last year. The
  reduction of tariff has almost been finished.
• Studying the property tax
• There are many tax for real estate in transaction
  items in china now, with fewer tax for the
  ownership of real estate and the tax burden is
  low . It is not good for the healthy development
  of real estate. Therefore, it is necessary to
  study the reform of property tax, to lead the
  housing consumption and adjust the wealth gap
  among residents.

47
III. Reform of budget management system

• In budget making, the departmental budget system
  should be improved further
• Pushing forward the classification reform of
  government revenue and expenditure. Formalizing
  the classification of revenue, expenditure
  function, and expenditure economics, to reflect
  the budget arrangement of each responsibility
  taken by the governments comprehensively and
  directly.
• Implementing the performance evaluating system
  for fiscal expenditure, and setting up unified
  and formalized evaluating rules. Building up
  performance evaluating index system, basic
  information database of performance budget , and
  performance budget system.

48

• In the aspects of budget executing, the
  emphasis should be focused on reform of exchequer
  collective buying payment system, and the
  government procurement system
• Integrating all the budget unit into the
  exchequer collective buyingpayment system.
  Formalizing the single account system of
  exchequer further, studying the way to improve
  the operation of the exchequer collective buying
  and payment.
• Building and improving the dynamic real time
  supervision system throughout the country,
  strengthening the supervision of the whole
  process of budget execution. Studying the rule of
  managing the exchequer cash, to improve the
  efficiency of the operation of exchequer fund.
• Fully implementing the reform of government
  procurement system. Through public bidding and
  asking, the scope and scale of government
  procurement could be further enhanced.
  Formalizing the procurement procedure and manner,
  improving the management of budget planning of
  procurement.

49
Thank You