The End: Tax Revenues Up 1.8%, Spending Up 40%; Credit Growth Weak; Infrastructure Bonds Languish

October general budget revenue growth was 8.7% versus prior 9.4%; the general public budget expenditures increased by 36.1%, versus prior 26.9%. Actual revenue growth was about 5.9% once accounting games are taken into account. When you dig into the numbers, it turns out tax revenue is only up 1.8% and non-tax fee growth was 63.6%! This trend was noted a couple weeks ago in Local Government Revenues Slide, Govts Use Fees to Cover Pension Deficits, but it turns out the governments are using fees to fund general spending. Meanwhile, spending has already accelerated for four consecutive months, but you'd need a microscope to find the impact in third quarter GDP. Fourth quarter GDP also got off to a bad start if October real estate investment, fixed asset investment, producer prices and industrial production have anything to say about it.

From HC Macro (华创宏观):

It is worth thinking a little paradox: on the one hand, the policy side stressed increased tax cuts to stimulate the vitality of enterprises, implementation universal fee cuts; on the other hand, the economic downturn, budget revenues are invisible "hard targets" to meet, worth thinking over how to balance the two.

See specific sub-types of taxes: 1) the main tax does not appear widespread growth picked up, value-added tax, consumption tax growth rate rebounded slightly, but the year on year growth rate of corporate income tax has turned negative, indicating that the business is still bogged down in the quagmire pessimistic; 2) by Real estate sales marginal weakening influence, and real estate-related local taxes revenue declined year on year growth, deed tax, land tax, urban land use tax and land occupation tax growth compared with September down. Aspects of government fund revenue, the state-owned land use right transfer income totaled decline narrowed from rebounded from -34.7% in September to -32.2% in October, but for the single month, it did not improve, from an increase of 3.5% in September, to a drop of 3.1% in October.

Proactive Fiscal Policy: central force, and place to keep up. October general budget expenditures increased by 36.1%, a 40-month high point, more than expected, showing steady growth, power and policy side has been switched to finance channels. Specifically, under the supervision of steady growth, positive force to keep local finance, in October the central government budget expenditures increased by 16.8%, while local governments increased spending by 39.9%. Expenditure on the field, environmental protection, urban and rural community affairs, transportation and other expenses to maintain a rapid growth rate.

Welcome two months of negative growth to meet future expenditure. Look from the current economic operation, it does not appear sharp downhill, after the budget adjustment, the annual revenue growth target of 7.3% should not be a problem. We are more worried about is the expenditure side, as of October, there have been more than four months of fiscal spending growth at more than 20%, the current rhythm of expenditure has been far faster than in previous years, the country's general public budget expenditure schedule than last year speed up 4 percentage points, respectively, the central level and the local speed up 3.2 and 4.2 percentage points.

Do a simple calculations: if not adjusted annual budget, the annual growth rate of 10.6% of the expenditure, 11 - 12 months of average monthly expenditure of 1.86 trillion scale, while the actual average monthly expenditure over the same period in 2014 to 19,100 million year on year decline of about 2.0% will appear.
If the economy doesn't respond when spending is growing at 39% yoy, what happens in November and December if that growth swings 42 percentage points to a 2% contraction? They've already shot their wad based on their budget projections and all they have to show for it is an October that was one of the worst months for the economy in 2015. I don't expect they'll actually cut spending, but even the die hard Keynesians have to start wondering about the logic of going into debt to continue spending like mad only to see the economy continue to slow.
From the demand side, the current export demand continued weak, external demand is difficult to have a better possibility of short-term; and continuing weakness in real estate investment, the manufacturing sector is still in the downstream channel profits, investment in infrastructure will continue to be the primary means of steady growth. So, continue to loose fiscal policy for subsequent "steady growth" is still critical.
Nuke the yuan.

iFeng: 中国财政收支现一大悖论:收入大减还怎么减税?

A week ago I posted Lower Your 2016 GDP Targets, Provinces Will Go All Out to Increase Q4 GDP. Forget 2016, things may not improve at all in the current quarter.

I looked up HC Macro and saw they had a piece out yesterday on the weak credit growth in October, asking why didn't the special infrastructure bonds increase credit growth?
Caijing: 华创宏观:专项金融债为什么无法带动信贷扩张?
Why didn't special financial bonds bring credit expansion? October new RMB loans under the old caliber 513.6 billion yuan, down from 536.4 billion in September, the amount of such loans is the lowest in the past 15 months. Far lower than expected data brings question is: why haven't special financial bonds brought credit expansion. First look at the breakdown of the data, the new long-term loans fell 329.4 billion yuan compared with September, to 351.7 billion yuan, slightly lower than July 2015's 381.7 billion yuan, of which real estate marginal weakening influence, the new residents Long-term loans fell by 125.8 billion yuan, the new long-term corporate loans fell more than 200 billion yuan; the new short-term loans and bill financing dropped 159 billion yuan. From a structural point of view of new loans, new local currency long-term loans accounted for 68.5% share of loans, remained at a relatively high level above 50%, shows that credit contraction is widespread. Market expectations are accompanied by special financial bonds issued, it will lead to matching credit funds. But in fact, perhaps the poor profitability of the project itself, but also a small number of projects or October, and then, or is itself the credit process and other technical problems have made October the new credit less than expected. Of course, the need will be in September and October data combined together, after all, a special financial bonds, the project can not be done monthly balance; if credit remains sluggish months later, it's time to think about how to promote financial capital leveraging a wide range of social capital.
The bonds referenced are the 1 trillion in infrastructure bonds announced in August. See China May Spend Another 1.3% of GDP on Infrastructure. One point was this:
Considering leverage, special bonds to raise capital can pry 1-3 times the total investment is expected to fund the first batch of bonds to raise or bring investment 3000-9000 yuan.
But there was no leveraged boost. Private investors don't want to get involved in the projects. The SCMP headline was "China to issue 300 billion yuan in bonds to fund huge infrastructure push." Infrastructure investment will keep the economy from rapidly slowing, but the government doesn't want to repeat the mistakes of 2008 and private investors aren't interested in making it for them. Where's the money going to come from?

Now there's also talk of steel output declining: China's Steel Output Heading for a Fall, Noble Group Warns
Steel output in China is set to tumble, according to commodity trader Noble Group Ltd., which warned that the slump in the top producer will hurt raw-material demand.


  1. They will nuke the yuan because their banking system is such an utter disaster, but if they nuke it in the actual hope of helping their economy, they will be sorely disappointed - the gains will end up right back at Wal-Mart and the general US consumer.

    - Luke

    1. I too expect they will weaken the yuan either directly or indirectly as part of a financial bailout. The cost/benefit of devaluing to boost exports is terrible even without assuming protectionism.