Thursday, July 26, 2012

China Tax Revenues as an Indication of the Slowing Chinese Economy

Ed Yradeni writes:
I recently asked one of my colleagues to work on China’s official tax revenues. He found the latest official release in Chinese and used Google’s translation utility to read it. He ran a chart showing tax revenues in yuan during H1-2012. A second chart shows the y/y growth in revenues during H1-2012 versus during H1-2011.
The data were released by the Ministry of Finance on Tuesday of this week and outlined in a story appearing in the English version of The data confirm a significant slowdown in Chinese economic growth during the first half of this year:

(1) Tax revenues rose only 9.8% y/y during H1-2012, down from 29.6% over the same period a year ago. Growth rates were down across all 11 major revenue sources.

(2) Personal income taxes actually declined 8.0%. A year ago, they rose 35.4%. Corporate income taxes rose 17.3%, but that was down from 38.3% a year ago.

(3) Revenues from property transactions took a hit. The ones from “Land Value Increment” rose 14.7% vs. 91.1% a year ago. “Deed” revenues fell 9.9% after rising 27.5% a year ago.
This data is likely indicating an even worse economy than when considered at first glance. There remains significant price inflation in China, so an increase of only 9.8% in tax revenues is likely a decline in real terms. The nominal decline in personal income taxes is very alarming (not, of course, because taxes are down--a good thing) but because the reason they are down is likely because of the start of a major downturn in the economy.

If the Chinese government would allow the economy to readjust from the previous money printing distortions, this would be a good thing, but China is likely to intervene and attempt to prop up the old structure and make things worse. Stagflation and a stock market crash appear very strong possibilities.

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