China’s economic policy dilemma increases as boosting growth is eating into local government coffers

While Bank of Jiangsu, Guangzhou Automobile and Weichai Power applauded China’s cut in value-added tax last year designed to help companies sustain growth during the economic slowdown, their home provinces had less to cheer about.

The three listed state-owned enterprises paid 668 million yuan (US$99.71 million), 430 million yuan and 139 million yuan less in the tax, respectively, during the first nine months of 2018, based on filings with the Shanghai and Shenzhen stock exchanges.

But Jiangsu, Guangdong and Shandong, the country’s richest provinces, reported revenues last year that fell short of the targets set at the start of 2018.

The companies’ gains at the expense of provincial government budgets underscore China’s growing economic dilemma: how to help businesses stay afloat and boost domestic consumption while maintaining local development, which is dependent on tax revenue.

China cut the value-added tax by one percentage point in May and raised the personal income tax allowance this year as it battled its slowest growth in nearly three decades amid the trade war with the United States, but this has taken a toll on local budgets.

Based on local government reports, most of China’s 31 provinces failed to reach their budget targets set last year.