China’s central bank chief hinted that Beijing could be considering giving greater fiscal autonomy to its provinces, saying China was big enough to borrow some elements from the 19-member euro zone’s playbook.
“Nations in the euro zone use a single currency but different countries implement different independent fiscal policy,” People’s Bank of China governor Zhou Xiaochuan said in a statement posted on the central bank’s website on Sunday.
“China, a vast and far-reaching land where fiscal conditions in different provinces vary, can consider learning from the euro zone’s experience.”
The remarks were made at an International Monetary Fund meeting in Washington last week.
Market watchers said it was rare to see the central bank chief speak in public in favour of differentiated fiscal policy, and it could mean greater power in store for lower-level governments on fiscal affairs, including tax collection and bond issuance.
Gross domestic product data suggests that economic growth across the country is increasingly headed in different directions, with double-digit growth in some places like Chongqing and recession in others, including the rust-belt province of Liaoning. Those differences are creating new challenges for policymakers in the world’s second-biggest economy.
Haitong Securities chief economist Li Xunlei said giving local governments more fiscal leeway could cut their heavy reliance on revenues gained from land sales – the underlying cause of the country’s property price rally – and make provincial officials more confident about governing local issues.
“A differentiated policy could put the regions in a better position to guide the local economy and better allocate resources,” Li said.
“Experience shows that attempts to seek balanced growth between different regions actually lead to huge waste.”
Li called for more fiscal reforms to streamline the way resources were allocated.
Under the existing fiscal regime, land auctions are one of the main sources of income for lower-level administrations, and local governments are the biggest beneficiaries of high land prices.
Nationwide, revenue from land sales grew 14 per cent to 2 trillion yuan (HK$2.3 trillion) in the first eight months of the year, according to finance ministry data.
But Lin Caiyi, chief economist at Guotai Junan Securities, doubted that Beijing would be willing to offer local governments more power over fiscal policy.
“No matter how differentiated the provinces are, they share one common thing – they are in the grip of the central government,” Lin said.
“As things are now, I see power increasingly centralised rather than more leeway being granted to local governments.”
In the statement yesterday, Zhou was quoted as saying that “though sour loans rose in the banking system, the risks are generally under control with ample capital coverage”.
Beijing has said repeatedly it will pursue a prudent monetary policy and a proactive fiscal policy as it tries to balance the need to shore up the economy and avoid debt-fuelled asset bubbles.
Bad loans are on the rise at mainland banks as corporate borrowers fail to repay their debts amid the slowdown in economic growth.
That increase has triggered concerns but data from the China Banking Regulatory Commission indicates the bad loan ratio nationwide was still at a reasonable level of 1.75 per cent at the end of June.
Market watchers have suggested that the official data understates the bad loan exposure and worse is to come.