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China boosts flexibility with new fiscal reforms: Fitch Ratings
The amendments stressed economic growth via investments in innovative industries.
The structural reforms announced at the Third Plenary Session of the Communist Party of China are seen to increase fiscal flexibility of the East Asian superpower by improving the balance of revenue and expenditure between central and local governments, according to Fitch Ratings.
“Fiscal reforms proposed in the concluding report generally appear designed to strengthen local and regional government (LRG) finances, notably by giving these administrations greater central government transfers and a larger cut of fiscal revenues from consumption taxes and surcharges. Meanwhile, the central government will assume more expenditure responsibilities,” Fitch said in a statement.
According to the agency, the Third Plenum focused on medium-term policy in its reforms. It gave emphasis on “high-quality economic development," led by investment in innovative industries, pushed for enhanced resilience and security of industrial supply chains amidst geopolitical tensions, and stressed the importance of the private sector.
The impact of these reforms on China's credit rating will depend partly on whether they affect the size of revenues or their allocation between local and central authorities, Fitch said. The agency believes the report focuses on the latter, “though some of its points about improving the tax structure - for example around personal income tax - could hint at changes that may bolster revenues.”
Over the long term, Fitch expects the reforms to provide local governments with more capabilities to boost standalone operating revenue and exchange expenditure flexibility.
“Rebalancing consumption tax revenue allocation could ultimately encourage local authorities to pursue policies that enhance consumption, especially in economically stronger regions. Adjusting the value-added tax credit refund split may also alleviate the burden on economically weaker provinces to pay tax credits,” Fitch said.
“Nonetheless, the overall impact of fiscal reforms on China’s sovereign and LRG credit profiles will depend on their details, which the plenum did not provide, as well as implementation,” it noted.
