2009-06-05

Tax Revenues Falling in China

From an article by Lu Lei explaining why there's "No End in Sight for Loose Monetary Policy":
Looking at tax revenues, local governments nationwide were unable to collect as much in the first quarter as in the same period 2008. In fact, tax receipts fell 1.4 percent, in sharp contrast to the 34.7 percent increase posted a year earlier. Cursed with double pressure from a directive to invest and shrinking revenue, local governments have had every incentive to use banks as financing proxies.

Now we're faced with the possibility of undesirable negative GDP growth. Banks, concerned about defaults, may grant only 300 billion yuan in new loans every month for the rest of the year. So we're stuck with a painful choice between two losing scenarios: a more moderate monetary policy that would cripple fiscal policy, leading to an outright "hard-landing;" or continuing a loose monetary policy backed by fiscal spending, which risks future loan losses and a weaker market. To get around the problem, the central bank may be forced to fill holes at banks by pumping in money, in effect imposing an inflation tax on all consumers.
(Emphasis mine) Electric power consumption is down and local tax revenues declined, but loans have exceed all of last year's total. Economic distortions are on the way, if the stock market and real estate market aren't already showing signs of speculative froth.

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