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Can new finance minister put China’s fiscal house in order?

Xiao Jie, a low-profile figure who has worked in the mainland’s fiscal apparatus for more than two decades, is now tasked with solving the nation’s local government debt overhang and fixing an increasingly intrusive tax regime.

Xiao, 59, who replaces Lou Jiwei as finance minister, has worked behind the scenes for much of his career, including in his previous role as deputy secretary general in the State Council.

His new position was announced as part of a broad ministerial reshuffle in Beijing ahead of the 19th party congress scheduled for next autumn.

One of his key jobs will be to address the nation’s ballooning debt, which has risen to about 300 per cent of gross domestic product – a dangerously high level for an emerging market, and largely the result of undisciplined borrowing by local authorities and state firms.

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Xiao’s policy decisions, from property taxes to revenue sharing between Beijing and local authorities, will not only shape the short-term performance of the world’s second largest economy but also determine the nation’s economic and social trajectory in the longer run.

“There are three difficult tasks for the new finance minister: a clean budget, a new tax regime … and fiscal revenue sharing between central and local governments,” said Fu Minjie, a researcher with the Chinese Academy of Social Sciences.

“No concrete progress has been made … a lot of work needs to be done,” Fu said.

Lou had ambitious plans when he became finance minister in 2013. He tried to centralise fiscal revenue management in Beijing so the central government could directly fund public services such as schools and hospitals.

He also tried to set clearer boundaries between government and quasi-government liabilities.

However, Lou’s achievements are still a matter of debate. “It’s worth noting that while Lou swept into office three years ago with … ideas about how to reform China’s fiscal system, his record of achievement has been mixed at best,” Arthur Kroeber, managing director of Gavekal Dragonomics, a research firm in Beijing, wrote in a note.

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Xiao was also likely to face resistance from local authorities, vested interests and “institutional arrangements”, said Gao Peiyong, the president of the National Academy of Economic Strategy under the Chinese Academy of Social Sciences.

“China’s fiscal reform is now embedded into the whole national governance … it’s not just about economic area, it is related to political systems,” Gao said. “It’s not a matter of money, it’s a matter of power.”

The government has a freer hand in taxing the people, given it doesn’t face an immediate danger of losing the support of taxpayers.

Xiao, who headed the tax administration in 2007 and 2013, has publicly argued that Beijing could tax its businesses and households more.

After US magazine Forbes listed the mainland as the world’s second harshest tax regime in a “tax misery” survey in 2009, Xiao, then the tax chief, published a long article in which he argued the overall tax burden was not high and had room to expand.

Many Chinese economists are now calling for direct tax cuts to aid businesses amid the economic slowdown.

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“China needs to cut its tax burden on companies and individuals rather than adding to their tax payment,” said Wang Fuzhong, a renowned Beijing-based economist and a board member of the China Society of World Economics.

“The government first needs to make its responsibilities clear: state force has already done a lot in shoring up the economy with heavy fiscal support and market force should take a bigger role with its higher efficiency,” he added.